4 Discussion Posts about China's Government

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Conclusion

BY FOCUSING on the critical weaknesses of the Chinese political sys-

tem in general, and on many of the hidden costs of China's transition

from communism in particular, this book attempts to show the limits of

a developmental autocracy. Despite its awe-inspiring economic growth

and progress, a set of self-destructive dynamics is weakening China's

most vital political institutions-the state and the ruling party. Lagging

behind the country's rapid economic modernization, China's closed

political system is increasingly becoming an anachronism. At present,

it is incapable of facilitating the representation of China's complex and

diverse social interests or mediating the conflict between an authoritar-

ian state and a liberalizing society.

The breakdown of the mechanisms of political accountability has led

to pervasive corruption and collusion among the ruling elites, while

the loss of confidence in the regime's own future has motivated its

insiders to engage in unrestrained predation. The inevitable deterio-

ration of governance that has resulted from these institutional failings

has undermined the state's capacity, heightened social tensions, and cast

into doubt the sustainability of the progress that China has achieved

since the late 1970s. Even China's gradualist economic reform strategy,

which has received almost universal endorsement for its flexibility and

efficacy, is centered on the CCP's goal of political survival, and not the

development of a true market economy. The economic costs of ensur-

ing the CCP's political monopoly through policies of rent protection,

though hidden, are real, substantial, and growing.

206

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Conclusion 207

By critically examining the understated social and political costs of

China's neoauthoritarian development strategy, this book also tries to

question three ideas that have retained their allure despite mounting

skepticism about their validity.

The first idea is that economic progress is the key determinant of po-

litical liberalization. While it is true that economic growth and mod-

ernization can create favorable conditions for the emergence of liberal

political regimes, China's slow movement toward political openness in

spite of twenty-five years of rapid economic growth suggests that the

choices of its ruling elites are the real determinants of democratiza-

tion. In fact, if anything, rapid short-term economic growth may have a

perversely negative impact on democratization because it provides all

the incentives for the ruling elites not to seek political liberalization.

The second idea is that the gradualist reform strategy works better

than the so-called big-bang approach. Of course, the big-bang ap-

proach has failed miserably in Russia and several other former Soviet

bloc countries, but the achievement of China's gradualist strategy has

been greatly overstated. More important, as Chapter 3 shows, the grad-

ualist strategy is ultimately unsustainable because of the dynamics of

rent dissipation and the mounting costs of inefficiency incurred by

path-dependent partial reforms.

The third idea is that of the efficacious neoauthoritarian develop-

mental state. Despite the examples of successful neoauthoritarian de-

velopmental states in East Asia, the political logic and institutional

determinants of autocracy-patronage dictated by regime survival, the

political monopoly of the authoritarian regime, and ineffective moni-

toring and policing of the state's agents in the absence of the rule of

law, civil liberties, and political opposition-are more likely to create a

predatory state than a developmental one.

This book also underscores the centrality of politics in general, and

the control of political power in particular, in setting the course of eco-

nomic and regime transitions. As the analysis of the political consider-

ations behind the Chinese leaders' policies on political and economic

reforms shows, the most critical determinant of their strategies is

whether they will strengthen or endanger their political survival. To

the extent that the overall effects of the chosen strategies increase the

chances of their political survival, the ruling elites can be flexible in

tactical terms, allowing partial reforms to boost the short-term vigor of

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208 Conclusion

the political and economic systems. But such tactical flexibility and ad-

justment have strict limits and must not blind us to the fundamental in-

compatibility between a monopolistic ruling party's determination to

perpetuate its power and a society's collective desire for a more auton-

omous and rule-based economic and political order. Having seized po-

litical power through the barrel of a gun, a formerly revolutionary

party, such as the CCP, will unlikely seek its own demise through volun-

tary reform.

However, a developmental autocracy's overriding goal of self-

perpetuation is ultimately imperiled by the self-destructive dynamics

found in nearly all autocracies: low political accountability, unrespon-

siveness, collusion, and corruption. In most cases, an autocratic regime's

collective interests are grossly misaligned with the individual interests

of its agents. Acting rationally, self-interested agents seek to maximize

their own gains, especially during a transitional period when changes in

the rules of the game create abundant opportunities for self-enrichment.

The economic and political costs incurred by these agents in their self-

dealing are inevitably borne by both the autocratic regime-which suf-

fers, as a result, from low legitimacy, weak authority, and organizational

corruption-and society-which pays in the form of deteriorating gov-

ernance and economic performance. Thus, it is inconceivable that a

developmental autocracy can retain its vigor for long. On the contrary,

the self-destructive dynamics embedded in a developmental autocracy

will most likely lead to a gradual buildup of systemic risks within the au-

tocratic regime and progressively sap its strength. That is why, except in

a very small number of cases, most self-styled developmental autocra-

cies eventually fail.

Given China's impressive growth performance, one may question

the pessimistic logic behind the main thesis of this study. If the Chinese

political system is so dysfunctional, why has the country maintained

such rapid economic growth since the late 1970s? There are several ex-

planations for this apparent paradox of bad governance and good

growth. First, the pathologies of a trapped transition became more se-

rious and visible in the 1990s, after the neoauthoritarian development

strategy had gained dominance within the CCP and the liberal forces,

both within the party and in society, were marginalized after Tiananmen.

To the extent that deterioration in governance has a lagging effect on

economic performance (for example, the deleterious effects of under-

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Conclusion 209

investment in human capital and public health usually do not become

visible until one or two generations later), it is possible that the path-

ologies of a trapped transition will have a material impact on macro-

economic performance in future years.

Second, in the short term, the growth rate can be pumped up by

high savings and, hence, investment rates and massive shifts of popula-

tion from agriculture to industry, the two major factors behind China's

rapid growth in recent years. In the Chinese case, with a national sav-

ings rate of 40 percent and an annual flow of $40 billion to $50 billion

in foreign direct investment since the late 1990s (about 3-4 percent of

GDP), high investment rates can propel growth even though the eco-

nomic system remains relatively inefficient.

Third, it is important to look at the quality of growth because the fo-

cus on growth rate alone tends to ignore the hidden costs and the low

quality of growth. In other words, growth rates may inaccurately reflect

or, indeed, can seriously misrepresent a society's welfare gains. For ex-

ample, if high growth is achieved at the expense of rising inequality,

underinvestment in human capital, damage to the environment, and

pervasive official corruption, such growth must be considered low qual-

ity. In China's case, high growth rates have been accompanied by all

these symptoms of low-quality growth. The massive accumulation of bad

loans in the Chinese banking system due to government-directed credit

must also be considered another symptom of low-quality growth, or a

cause of artificially high growth because such wasted investments have

been counted as economic output.

Finally, the effects of bad governance on China's economic perfor-

mance may already be visible. By international comparison, China is

growing too slowly, as Martin Wolf argued. Given its size, its low starting

base, and its high savings rate and high investments, China ought to

have grown much faster than the 6.1 percent annual rate recorded be-

tween 1978 and 2003. 1 A most likely explanation for China's not living

up to its economic potential is the institutional weakness of the politi-

cal system. Of course, identifying weak institutions as causes of poor

performance gives one reasons for both optimism and pessimism.

Should China manage to reform these institutions, its economic per-

formance will undoubtedly improve. But if it fails to do so, then its growth

rate will probably stagnate or even decline, especially when macroeco-

nomic conditions become less favorable. In fact, China experienced

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210 Conclusion

such an episode of slow growth in 1998-2000. Research by Thomas Rawski shows that, contrary to official Chinese data, the Chinese econ-

omy barely grew during this period. 2

Getting Out of a Trapped Transition

This study raises another important question: how can a partial reform

equilibrium end? Put metaphorically, how can a country such as China

get out of the transition trap? To the extent that a trapped transition

will eventually create conditions that force the ruling elites to make

fundamental choices, there are three possible scenarios or ways out. By

and large, these choices are similar to those faced by political leaders

trapped in an unsatisfactory and unsustainable status quo-as was the

case following the end of the Cultural Revolution.

First, given the self-destructive dynamics of a trapped transition, a

neoauthoritarian regime will soon exhaust its economic and political

vitality. With deteriorating economic performance and increasingly ris-

ing social tensions, China's ruling elites will be forced to choose be-

tween maintaining a deteriorating status quo and taking the risks of

more radical reforms to restore political accountability and curb decen-

tralized predation. If they opt for reform, they will most likely mobilize

new political groups to overcome the resistance of the beneficiaries of

a trapped transition and help break the old partial reform equilibrium.

As the experience of the former Soviet Union demonstrates, however,

mobilizing societal forces to pressure a discredited regime to change

can inadvertently unleash an antiregime revolution. Such "run-away re-

form," or the "de Tocqueville paradox," poses great risks to potential

reformers. 3 Once the previously excluded groups are fully mobilized,

reformers will lose their ability to control the agenda and the goals of

these newly empowered groups. Therefore, a country can get out of a

trapped transition without experiencing social convulsion only if re-

formers can maintain full control of the renewed reform process. As

Guillermo O'Donnell and Philippe Schmitter showed, such an out-

come is most likely only when reformers gain the cooperation of the

moderate members of the societal opposition. 4

Second, one of the alternatives to getting out of a trapped transition

through renewed reforms is a regime collapse. The logic of rent dissipa-

tion and decentralized predation means that the institutional degener-

ation of a developmental autocracy will progressively spread, resulting

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Conclusion 211

in deteriorating performance of the authoritarian regime, especially in

terms of economic growth. Facing declining political legitimacy and

prospects of social turmoil, ruling elites with available exit options will

most likely take them, particularly during a crisis when the regime's

own survival is imperiled. Under such circumstances, we can expect

the political equivalent of a bank run-a panicked rush for the exit by

the regime's insiders who no longer have the will or the incentive to

defend the regime. Unfortunately, the collapse of a developmental

autocracy under crisis conditions may break the partial reform equilib-

rium, but is no guarantee of a return to a stable liberal political order,

as shown by the difficulties experienced by Russia after the Soviet col-

lapse and by Indonesia after the demise of the Suharto regime.

Third, for a large and diverse country such as China, it is often diffi-

cult to build a strong enough new reform coalition at the national level.

But regional and local reform coalitions can be formed with a combi-

nation of the initiatives of forward-looking local elites and pressure

from societal forces. Although the devolution of power has led to the

decentralization of predation, two developments can potentially gen-

erate more positive dynamics for reform. Devolution of power will, in

some cases, result in greater political accountability for local elites. More

important, devolution of power in China's context has encouraged in-

terregional competition for capital, labor, and markets. Local account-

ability and interregional competition mayjointly motivate local elites and

civil society groups to experiment with new institutional reforms that

can address the ills of a trapped transition at the local level. It is worth

noting that, in the 1990s, the most innovative governance reform attempts,

such as the township-level elections and refining village elections, were

"middle-up" initiatives-risk-taking ideas implemented by progressive

local officials to remedy local problems. If more jurisdictions take the

middle-up route, at least some of the social and political ills caused by

a trapped transition can be ameliorated at the local level. In the end,

local initiatives will probably encourage governance divergence across

China, as some areas manage to get out of a trapped transition through

reform and others continue to stagnate or even deteriorate further.

Implications for the International Community

One must not rule out the possibility that a country such as China can be

stuck in a trapped transition for an extended period. It is conceivable

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212 Conclusion

that a developmen tal autocracy can continue to use the same mix of re-

pression, co-optation, and adaptation to maintain an elite-based ruling

coalition for decades. Deteriorating governance and economic perfor-

mance may be the necessary-but not sufficient-conditions for the

emergence of a fatal crisis. A combination of tactical adaptation, im-

provisation, luck, and mass apathy may allow the ruling elites to stay in

power even as the country is mired in misrule.

The likelihood that China's transition to a market economy and

open society has stalled has serious implications for policy. For Chinese

leaders, a transition process trapped in a partial reform equilibrium

endangers their ambitious goal of becoming a full-fledged global

power. The combination of flawed economic and political institutions

creates market distortions, inefficient uses of resources, and opportu-

nities for massive systemic corruption. The rapid economic develop-

ment China was able to achieve in the first twenty-five years of its

transition will unlikely be sustained. Instead of becoming a global eco-

nomic power, China may enter a prolonged period of stagnation.

In addition, the risks of domestic instability will likely increase, both

as a result of the social frustrations caused by poor economic perfor-

mance and the political dissatisfaction against an authoritarian, exclu-

sionary, corrupt, and ineffective regime. Given the difficulties and costs

associated with forming viable coherent opposition groups capable of

opposing and offering a credible alternative to the CCP, it is difficult to

imagine that the CCP behemoth can be dethroned by an organized

coalition from below. Absent a deep and wide fracture that shatters the

CCP from within, the collapse of the CCP may be a low-probability

event. Thus, the unavailability of a credible alternative and the slim pos-

sibility of a regime implosion suggest that political stagnation would ac-

company economic stagnation, with further erosion of state capacity,

the decline of the CCP's legitimacy, and increases in lawlessness, cor-

ruption, and social disorder. Ultimately, such stagnation will progres-

sively increase the risks of regime collapse or state failure, as the strains

accumulate in the dysfunctional political and economic systems.

For the international community, a China trapped in prolonged eco-

nomic and political stagnation poses a set of challenges few have contem-

plated seriously. Since the 1990s, China's rapid economic ascendance

has changed the West's assessment of its capabilities and prospects.

Projecting China's future growth on the basis of its stellar development

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Conclusion 213

record in the recent past, the Western business community views China

as an unprecedented commercial opportunity and a strategic market.

Although China may be a difficult place to do business, Western busi-

nesses have learned how to manage and live with the risks inherent in

that nation's political and economic environments. But if the implica-

tions of this study are borne out, the lofty expectations of Western busi-

nesses are most likely to be disappointed. China may be one of the

biggest economies of the world, but the high rates of growth and gen-

eration of wealth projected by Western businesses will unlikely materi-

alize. At the very least, the conclusions drawn from this study should

make these businesses reassess their China strategy and adjust the risk

premium they demand in return for their investments.

At the geopolitical level, the prospect of a rising China that could

challenge the existing world order in general, and the preeminence of

the United States in particular, has dominated the debate on the West's

policy toward China since the mid-1990s. 5 Security analysts are preoc-

cupied with China's potential military capabilities and intentions. Even

though the China debate has spawned two conflicting policy approaches,

often labeled "containment" and "engagement," the fundamental prem-

ise underlying these two opposing approaches is similar. Advocates of

engagement and containment both assume China's rise as a given, and

their differing policy prescriptions focus on projected Chinese strength,

rather than its weakness. To be sure, China's weaknesses sometimes

cause concerns in the West. But on such occasions, relatively rare in the

1990s when the Chinese economy boomed, analysis of China's problems

tends to be extremely pessimistic, often with predictions of an immi-

nent collapse of the Chinese political order and economy.6

Should China's rise fizzle, as this book suggests is highly likely if no

fundamental political reforms are implemented, both the containers

and engagers will be disappointed. For the hard-nosed realists ob-

sessed with the potential threat from a China with peer-competitor ca-

pabilities, a China stuck in its incomplete transition means a much

weaker China incapable of mounting a real challenge for global pre-

eminence. In practical terms, the careful construction of a strategic bal-

ance of power designed to counter China's rising influence, as pursued

by the George W. Bush administration through its efforts to recruit

Japan and India into a potential anti-China security alliance, may turn

out to be unnecessary. Needless to say, the tens of billions of dollars in

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214 Conclusion

military spending justified as a response to China's rIsIng military

threat will be wasted. Without China as a peer competitor, Washing-

ton's strategic thinkers will have to look elsewhere for new threats.

But liberal engagers will also have a harder time reconciling their ex-

pectations that economic progress will bring democratization with the

hard reality that the Chinese experience has consistently defied such

expectations. With progress toward a genuine open society frustrat-

ingly slow in China, Western liberals may find it increasingly difficult to

maintain their optimism about China's future as a candidate for de-

mocratization. In policy terms, the intellectual case for engagement

with China that has been made will rest on even more shaky ground.

The international community should take another look at China and

start preparing, at least intellectually, for the unpleasant prospect that

China may not only fail to fully realize its potential, but also descend in to

long-term stagnation. Such a reassessment of China's future should pro-

duce a new and more realistic framework in analyzing China's ongoing

transformation and addressing the real challenges it brings. Instead of

viewing China as the new superpower of the twenty-first century, the in-

ternational community may want to see it as an underperforming giant

that has failed to seize a historic opportunity for making a fundamental

break with its authoritarian past and paid a heavy price for it.

In all likelihood, a China trapped in partial reforms would resemble,

in several crucial respects, an incapacitated state. Unlike a completely

failed state, an incapacitated state retains nominal national sovereignty,

territorial integrity, and central government authority. Its ruling elites,

through the monopoly of political power, remain unchallenged. How-

ever, in an incapacitated state, the government's comprehensive capa-

bility of governing is feeble, even though it may retain a limited ability

to enforce its will and rule selectively, mostly under circumstances

where such demonstration of state power affirms, at the symbolic level,

the existence of a centralized political authority. Thus, over a wide

range of issues deemed of critical interest to the international commu-

nity-such as environmental protection, nonproliferation, antinar-

cotics, migration, control of the spread of HIV/AIDS, and poverty

alleviation-an incapacitated state would be unable to honor its com-

mitments or perform its governing functions effectively. The interna-

tional community would likely find threats and problems posed by

incapacitated states ultimately more frustrating and difficult to address

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Conclusion 215

because traditional approaches to foreign policy contain few effective

prescriptions to treat state incapacitation. Given China's huge size and

its role in global security and the international economy, the challenge

posed by an incapacitated state in China would simply overwhelm the

international community's ability (even if we assume willingness) to pro-

vide meaningful assistance. The spillover effects from China's internal

woes and weaknesses would not only affect the interests of many nations,

but also would make China's problems those of the entire international

community.

Few may have viewed China's prospects through such dark lenses.

But one ignores the self-destructive logic of predatory authoritarianism

at his own peril.

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Appendix

Notes

Acknowledgments

Index

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