China and the Future of the Developmental State- Success and Propaganda

Every country with an advanced economy in East Asia- Japan, South Korea, Taiwan, Singapore- attributes its success to a state-led model of development. The remarkable thing about China was that it managed to shift from a Soviet-style command economy, wherein the government owns all major industry and directs all production, to a state planning model wherein the State shapes and facilitates the economy with a much lighter touch. To understand the implications of this legacy of state planning for the future of China, we have to understand not only the history of state-led development, but the ways in which it is used to support Party rule and the obstacles it faces today.

Directed Development
The history of the state’s role in China’s development is becoming fairly well-known. At the national level, the state has intervened systematically in order to grow key national “pillar” industries. It has used tariff barriers to encourage import-substitution. Along with other industrial, trade and investment policies, this has allowed a relatively rapid mobilisation of resources toward the “commanding heights” of the economy.

By commanding heights, China means the industries that it believes form the core of a nation’s industrial strength, both more traditional industries, such as steel and automobiles, and new entrants such as high-tech.

In the case of the automotive industry, the state was able to elicit key transfers of technology and expertise from multinational automakers to their Chinese partners, thus making sure that the lion’s share of development on future vehicles could be done in China. Development toward a market economy becomes a national project that focuses on developing certain key capabilities to ensure national economic strength and competitiveness.

The Chinese version of economic planning has also relied on the more decentralised entrepreneurship of local officials. The mechanisms of state planning and their effects in shaping and encouraging economic development are felt at a local level.

At the township and county levels, enterprises compete for a place on government enterprise lists, which in turn confers preferential assistance from the state in securing land, capital and other inputs needed for growth. Under the cadre responsibility system, township mayors sign contracts with the county which include economic productivity measures.

Some scholars have suggested that the measure of the strength (or relevance) of a developmental state should not be the ability of the state to engage in unilateral action, but rather its ability to coordinate among societal and economic actors to achieve the priorities it has selected through “strategic guidance.”

In the Chinese case, a decentralised state allows initiative, and competition, at the lower levels of government and in local industry, while providing structural incentives to rapidly advance the most successful enterprises that line up with the broad economic plans of the state.

This process was not without problems. Although highly successful at cultivating growth, the decentralised approach to state planning meant not only that lower government levels tended to coddle inefficient industries and become corrupt themselves, but that government itself grew in proportion to the economy.

Adaptation and Restructuring
Beginning in 1995, the state began to release all but the most profitable State-Owned Industries, and in 1998 began a series of programs designed to reduce government size and improve the efficiency of economic regulation. Although these reforms did liberalise large parts of the economy, they do not represent a transition from a planned economy to a market economy, but rather a new concentration of resources in strategic areas.

The idea has been not only to pick the winners in a Darwinian competition for state patronage, but to maintain state control of the “commanding heights” and to ensure that China had big, globally-competitive industries rather than smaller enterprises competing nationally.

State Agency
If this seems strange, the mental leap we have to make is that the state itself is viewed almost as an enterprise, competing globally for the public good of its citizens. We can carp about unfair practices all we want, but the truth is that nations which adopt this principle will tend to gain the high ground (and every Western nation does engage in protectionism in one industry or another, as the Chinese are quick to point out), while others get left behind.

Propaganda
Chinese scholars persistently argue that the transition from command planning to reform economic planning was possible in China because of the continuing strength and coherence of the Party. In contrast to post-Soviet states, China was able to leverage the Party’s authority to systematically build an economy based on long-term national interest, rather than surrendering abruptly to market forces with disastrous consequences as Russia did.

Whether or not this is wholely supportable, it’s important to understand how the Party and many Chinese would like us to see the party-state.

Authoritarianism and the Developmental State
There is absolutely no question that the Chinese approach to development has worked incredibly well, or that the Party has gained enormous legitimacy with its people because of it. But when we ask about the future of the developmental state, we have to remember how the Party uses it, both ideologically and materially.

Consider this statement from Yip Kwok-wah, a former pro-Communist leader in Hong Kong and adviser to the Hong Kong Chief Executive, in his recent book The Uniqueness of China’s Developmental Model, on the difference between democracy and party rule:

“(Western) people may feel they are participating in the formation of the government but may find that, after venting their anger at the ballot box, there is no improvement in their welfare… The China Model, on the other hand, emphasises the effectiveness of government policies… the legitimacy of government policies through effective results is different from legitimacy achieved through election… Public opinion and sentiment have put great pressure on the (Chinese) government on many occassions, resulting in the government implementing measures to comply with the people’s wishes. Mao Zedong’s principle of “from the mass to the mass” has been largely adopted.”

He then proceeds to tie his argument directly into the developmental state by invoking Nobel laureate Amartya Sen’s assertion that people will only have genuine freedom of political choice when their basic needs are met. You’ve heard of “guns or butter”? This is democracy or butter.

First of all, let’s look at the uncomfortable truths in Yip’s assertions. For many of us, his comments about an uncaring political establishment incapable of consistent policy-making for the public good despite democratic process may strike very close to home. The Party has won a great deal of legitimacy by providing public goods, and it has certainly bowed to the wishes of the public in many instances.

As for the argument that people only have genuine political choice when they aren’t going hungry, well, consider Egypt. The former regime was overthrown by a minority of educated urban people. The new government has been put in place largely by the vote of the rural poor, whose basic needs have always been met more by the Muslim Brotherhood than by the state.

No More Incentive
But then we must consider another recent book, Unequal China edited by Sun Wanning and Guo Yingjie. Like many books about China, it is filled with tales of all the issues on which the Party is not listening to the people- unequal laws, gender discrimination, unequal development, unjust land laws, discrimination in social services and education.

And even many of these issues come second to the issues of labour abuses, environmental degradation, corruption, censorship and so many others that plague China. As premier, Wen Jiabao spent ten years telling the people that these problems must be dealt with. They never were, and the new administration is unlikely to change that.

The Chinese government reaches its highest adaptive potential when motivated by the need to maintain legitimacy though the provision of a public good, whether that be economic prosperity, economic sustainability or environmental health. But the catch is, they don’t think they need to adapt anymore. No crowds are assembling in China to campaign for democratic reform, no new student movement seeks to topple the government.

Those who campaign on issues like corruption or labour are effectively canalised within their own special interest. The government and the Party will make concessions in specific instances to keep a lid on popular protest- but it will not reform the system.

And why would it? The children of the Party, the “princelings” or taizidang, own vast amounts of the economy thanks to their covert pillaging of the old state industries and the power of their connections, control the commanding heights of the economy. They benefit from a loyal military, as well as the resurgent nationalism of a China that, thanks to the Party, is again truly the Middle Kingdom.

The Party experiences no immediate threat to its existence, as it did when reform and opening began. And without that, it has no reason at all to go the distance in satisfying the desires of the people to the detriment of the expensive lifestyles of its own higher cadres. Lacking that will, state-led development will hit a dead end. The Party might find itself trying to control a country on overload, and sooner than it thinks.

But even if the Party falls or is forced to radically reform, it is doubtful that state planning will ever entirely disappear. The people understand that a country the size of China must be managed, one way or another.

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China in the South Sea Islands: Pride Goeth (first published 7/23/12)

This article was written just before the recent announcement by China of its intention to garrison the Paracel Islands, and should be read accordingly.

When island standoffs come once every few weeks, and the grounding of Chinese frigates on disputed shoals is the expected order of the day, the question “Why the heck does anyone care?” moves to the forefront of the minds of most reasonable observers. What the Spratleys or the Paracels actually represent to China’s foreign policy from an internal perspective is a question comparatively ignored. Of course, answers of a sort to both questions are quick to hand. Resources, national prestige. But what does that really mean?

Energy

Is the CCP so worried about the vulnerability of their energy supplies, not to mention future shortfalls as development continues, that they are consciously risking the very considerable goodwill they had amassed in the past decade of Chiang Mai currency swaps, the China-ASEAN Free Trade Agreement and a carefully-strategized soft-power offensive on the geostrategic necessity of finding abundant, proximate oil and gas resources? There is reason to believe that China is deeply concerned about the vulnerability of its African oil supply to disruption en route through the Indian Ocean and the Malacca Straits. Further, the CCP has known for over a decade that it will have to dampen consumption levels and invest in sustainable technologies or risk outstripping the conceivable energy (and other) supplies available to them. However, it is quite likely that they have a few years left to go before that wall is in sight.

Prestige and Territory

East Asia is home to quite a number of ongoing territorial disputes, both maritime and continental, and China is involved in quite a few of them, yet life has somehow gone on without any hint of resolution. It could be that what China might have seen as pre-emptive actions in the region- notably Vietnam’s threat last year to grant oil concessions in the Spratleys- required a countervailing assertiveness for home consumption, and that the issue has snowballed. If this were the case, we could expect China to look for an opportunity to cool the issue down.

What Happened to the ‘Peaceful Rise’?

Why didn’t the recent ASEAN meeting show any sign of this? China wants all of these issues to be negotiated on a strictly bilateral basis. China has historically been quite careful about the limitations it might incur through multilateral commitments, and ASEAN can be said to bear much of the credit for acculturating China to the many multilateral organisations it has joined in the last decade. In the end, however, the strain of caution remains, and China may well see multilateral negotiation as a dangerous gamble particularly here, where they would have to be seen to play by ASEAN rules in the best case, and in the worst case the United States might try to muscle in, as it already has. Unfortunately, many ASEAN countries seem to have been driven beyond the point where the status quo is considered acceptable. The issue is live, and China may not be able to defuse it.

That is one interpretation. Another is that the CCP has yet again done too good a job substituting nationalism for Maoism. This has got it into trouble before. Widespread protests erupted within China in 2005 over Japan’s bid for a Security Council seat, and were immediately suppressed by an embarrassed Communist Party. It could be that popular opinion has swung through China Emergent all the way to China Triumphant. The tone of Chinese military rhetoric and building programs certainly suggests something of the kind. If so, then the secret fear of many China observers could come to pass: that a situation might develop in which the Chinese Communist Party feels that it cannot defy nationalist sentiment in the name of reason and will abandon its long policy of conflict containment in order to survive politically.

By far the worst case scenario is that the Party leadership, having decided that it cannot or will not clean up the internal corruption, political and labour scandals which have led to a constant, exponential annual increase in public protest since the 1990s, actually views these events as a useful distraction. This is the worst case, not because the Party is stirring up conflict as a distraction a la General Galtieri in the Falklands, but because if it has truly thrown in the towel and given into another generation of corruption under the Party “princelings” (and the structure of the new leadership suggests that possibility) then China surely is headed for a different kind of wall, a political wall in addition to a resource wall. It will surely take other countries with it.

The Tone of the Region is up to China

In any case, whatever the scenario we entertain, the significance of the island disputes is not in the disputes themselves- but that does not mean they are not significant. Every scenario points to the same choice. If China doesn’t find the will and the means to cool things off (and no one but China can), China may find itself crashing right through all its rhetoric of “peaceful rise” and all of its hard-won trust in the region. China can be either the nationalist bully, or the conciliatory regional power- but the choice is in play.

Afterword

When this article was first written, it concluded with the words “Hang on to your hats.” Little did it appear how apt that advice might be. The decision to garrison the Paracels comes after the installation of a municipal government for the islands’ sparse population, and announcements regarding the development of tourism and natural resources. By themselves, any of these could be seen as diplomatic manoeuvres, and the garrisoning of the islands, which were captured from South Vietnam in 1974, is not an entirely surprising extension of China’s military presence in the group. Taken together, however, all of these things indicate a disturbing assurance on the part of China that it can make a disputed island group its own simply by behaving as though it were. China either does not expect anyone to muster the force or the will to effectively contest such a policy, or wishes for such an incident in order to demonstrate the futility of any resistance to its territorial boxes.

Regardless of the military fact that China can indisputably win any conflict up to a regional war with any or all Southeast Asian countries, in either case, it is making a serious mistake. Even if everyone backs down, the results would undoubtedly polarise the region, and even if no one wanted to risk open conflict, this would be a definitive end to the friendly face of China’s rise, and the beginning of a path that might ultimately lead to a confrontation involving the United States, something that could not fail to be disastrous for everyone involved.