June 25, 2006

Pei -- China's Trapped Transition

[cross-posted on Chicagoboyz]

Pei, Minxin, China's Trapped Transition: The Limits of Developmental Autocracy, Harvard Univ Press, 2006. 294pp.

As much as the end of the Cold War, the big story of the tail end of the 20th century was the movement toward economic liberalism in mainland China after 1979. After twenty-five years on a new compass heading, how are things going?

For the interested general reader, business, foreign policy, and military websites provide deeply contradictory news. On the one hand, China seems to have dramatically increased its per capita wealth and changed its peoples' lifestyle faster than any other nation in history. On the other hand, the vast majority of Chinese are stuck in unproductive state-owned enterprises (SOEs) or subject to the whim of central authorities when it comes to the pricing of agricultural goods. That translates into hundreds of millions of people with little hope of climbing the Chinese ladder of prosperity in their lifetimes. China, according to the demographers and "best-case" economists, will still grow old before it grows rich.

On the military front, China appears as the most likely candidate for super-power status with a central autocratic government, a growing economic engine to fund military purchases, a massive population, a compliant diaspora funneling international secrets homeward (Time article [subscription] from early 2005), and a chip on its shoulder lovingly nurtured for centuries as a substitute for an effective political theory. The naysayers, in contrast, claim that China is fortress with no one manning the walls ... an army, navy, and air force more effective on paper than in reality, and a billion people dangerously dependent on potential enemies for the raw materials and consumer markets that would subsidize any military modernization.

Which is it?

While the wonks can debate the half-full, half-empty argument endlessly, Minxin Pei, a senior associate and director of the China Program at the Carnegie Endowment for International Peace in Washington DC., has given us a book that explains to the lay person how China is actually run today ... who makes the decisions about rural and urban life, about justice and banking, about domestic and foreign markets. This overview is written smoothly enough to keep a general reader's interest but it does take the time to translate the literature from Chinese, and to set the Chinese quandry in a theoretical context, comparing the nation to other (typically much smaller) nations that have made the jump from communist to free-market economies.

Ten years after beginning its modernization drive, China responded to the end of the Cold War, and the Tiananmen massacre, with a conscious shift in focus to "gradualism" ... on loosening central control over economic activity while reducing any latitude for political liberalization. The collapse, and criminal or kleptocratic trajectory, of the Soviet Union and its satellites was seen as a sober warning to Chinese leadership of the perils of letting democracy loose at the same time as market economics. The peril, of course, would be the Chinese Communist Party's (CCP) complete loss of power. Serious internal lip service was, and is, given to modernizing the political apparatus of the Chinese state, but the slim and often vague initiatives that resulted now meet a grim social reality.

The Chinese program of "gradualism" decentralized party decisions, but not surprisingly, it vastly increased the potential for party apparatchiks to successfully siphon off public funds. As China monetized its national assets (agricultural, cultural, industrial), and absorbed vast quantities of foreign direct investment (FDI), it created a dual economy ... one was subject to the rigours of the marketplace and created a Chinese incentive to rationalize protection of foreign property and contract rights. The other economy was woefully managed, and hugely leveraged into debt. In order to maintain its control over money and the tools of patronage, the CCP kept control over the areas of the economy least transparent to foreign investors. A deeply corrupt banking system allows systematic looting of both state subsidies and any emerging market opportunities (typically in real estate development). As a result, key domestic economic segments are profoundly corrupt, inefficient, and effectively bankrupt.

Corruption, rather than being an end-game to foreign emigration by party and Army members (or their families) as it was in the early days of liberalization, became a "group sport." Bureaucrats, businessmen, and increasingly Mafia, co-operated in the methodical looting of public and private funds. Not only was China's growing wealth providing greater opportunity and scale for corruption but corrupt officials now have more, and safer, places to abscond to when they are discovered. And as for discovery and punishment, that leads to another point made by the author.

Pei claims that the CCP has now established a stasis -- a decentralized predatory state:

  1. It cannot enforce accountability of its cadres without highlighting its lack of power and supervision over the hinterlands and vast bureaucracy.
  2. It cannot wean itself from its inherently predatory behaviour because the captured money, and associated party advantage, is all that it has left to offer adherents.
  3. It cannot address the catastrophic drop in party morale because the majority of cadres are now convinced that socialism is a lost cause. The best strategy therefore (individual and communal) is to take as much out of the system as possible before it collapses.

It is in the unique combination of two features of the Chinese state (decentralized, predatory) that the "trapped transition" occurs. We have historical references for centralized predatory states. We know that they have an inherent threshold of mass terror and repression beyond which they cannot operate if they want a functional economy. Similarly, we know that centralized predatory states can monopolize resources (and corruption) to a large degree, and keep the subsistence economy of the masses relatively equitable.

But China's has released both its people and its cadres to develop the economy at a maximum rate, without the cultural and political elements of supervision, of governance, that would keep the nation from developing big dislocations in the economic and social spheres.

China now, according to Pei, suffers from a profound "governance deficit." It can no longer provide "law and order," health care, education, infrastructure maintenance, or many of the other necessary functions of the modern nation-state ... too much of its time and financial resources are spent in simply keeping itself afloat. The resulting gap between citizen expectations and bureaucratic announcements can be extreme and is leading to increasing social unrest -- riots as the only way to induce governmental change.

By the time Pei has finished his overview (with generous, careful, and thorough presentation of the "half-full" arguments at each stage), one comes away with both a better understanding of how China has managed its economic "miracle" and how shaky the governmental underpinnings now are. This is a nation that's riding the tiger but in no way is successfully directing it. Governing China effectively would require weaning the party from its parasitic role in the Chinese economy. And it cannot do that without relinquishing authority to a democratically elected government that would eliminate the need for the CCP.

Pei's book certainly doesn't qualify as light summer reading but it reads smoothly and logically as a high-level summary of political and economic science. For someone wanting to brief themselves in detail on the Chinese future, I feel it can be read to great benefit in tandem with W.J.F Jenner's The Tyranny of History" The Roots of China's Crisis (an assessment of the cultural/linguistic constraints on Chinese modernization) and Richard E. Nisbett's The Geography of Thought: How Asians and Westerners Think Differently ... And Why (summarizing cognitive differences between regions of the planet that impact individualization and innovation -- reviewed here).

Read as a set, these three books provide insight into the hurdles facing cultures that want to duplicate the success of the Anglosphere and European continental nations.

Table of Contents

Introduction [1]
Why Transitions Get Trapped: A Theoretical Framework [17]
Democratizing China? [45]
Rent Protection and Dissipation: The Dark Side of Gradualism [96]
Transforming the State: From Developmental to Predatory [132]
China's Mounting Governance Deficits [167]
Conclusion [206]

Posted by jmccormick at June 25, 2006 07:24 PM

China's problems may be legion, but when reading such commentary I am often reminded of descriptions of the Soviet Union and Germany in the 1930s as being basket-cases. Just because an autocratic state falls far short of perfection does not mean that it cannot become an existential threat to everyone else. China may have deep structural economic and cultural problems, but those would probably not prevent it from killing millions of people if it wanted to start a global war. Nationalism is not a rational phenomena, and socio-economic concerns, especially obscure topics such as 'governance deficits', will not stand in its way once it starts to steamroller.

Posted by: Mat Krepicz at June 27, 2006 01:35 PM

I am reminded of predictions in the early 1980s that the USSR would not survive the late 1980s. Those predictions were accurate.

Posted by: Milburn Korbechov at June 27, 2006 08:44 PM

Milburn, technically those predictions were inaccurate. The USSR survived the late 80s. It was disbanded in 1991.

Posted by: Mat Krepicz at June 28, 2006 09:05 AM

I predict that China's development will peak in just a few years. The reason is energy. The globe is in a transition from cheap oil to more expensive energy sources. Cheap oil is required for rapid and sustained economic growth.

Bad governance will lock a country out of growth and prosperty but only energy can fuel it.

China's leadership does seem aware of this looming limitation. Look at their efforts at energy resource security and their sensitivity to threats to future energy imports.

They are investing in large scale domestic coal, hydro, and nuclear projects but technically, the coming global crunch will focus on liquid transport fuels - gasoline, diesel, and jet fuels. These will be much harder to substitute, certainly at a higher cost and probably at a lower productivity.

What China will do in an energy resource constrained world economy remains to be seen. I think that a drastically slowed increase in standard of living will present real political challenges for the CCP and could bring forth the decentralizing cycle so common in Chinese history.

Posted by: Whitehall at June 28, 2006 04:36 PM

I ask this question in a non-ironic sense: Do we know that China doesn't have oil? Which companies have explored for oil? It's terribly, terribly large. Has this vast area been explored by competent people - meaning, in this case - Americans? There's no oil in all of China? That sounds pretty unfortunate, given that Scotland has oil.

Is there "a coming global crunch"? Other than sounding manly, what does this mean?

Second, why would China want to threaten its customers? They want a world economy just as much as we do... more even.

Posted by: Verity at July 1, 2006 08:29 PM
Post a comment

Remember personal info?