Undemocratic capitalism: China and the limits of economism.

• Author: Zweig, David

The Clinton administration's China policy has come under attack from many quarters for being too conciliatory, too optimistic and too compromised by a nexus of money and insider politics. But the President and his aides deflect each jab by contending that, despite episodic problems and pratfalls, a policy of engaging China on a broad range of issues has the best chance of maximizing American influence and impelling China toward positive change. The key dynamic is assumed to be rapid economic growth, which, it is tenaciously held, will result ultimately in political liberalization. That, in turn, would not solve all problems between the United States and China, but it would conventionalize those problems and, presumably, make them easier to manage.

In this line of assumptions the administration has many scholarly allies. Henry Rowen, Minxin Pei and many others have argued that one of the few hard conclusions of comparative politics - that rising income levels are conducive to political democratization - applies to China no less than it has applied to Europe and Latin America.(1) In this view, increased wealth, information and trade will create and mobilize a new middle class whose interests and social power will ultimately undermine the Communist Party's monopoly on political power, leading in due course to some form of democratic politics. According to this view, too, elections in rural China, advances toward the rule of law, the strengthening of the National People's Congress (NPC) and media liberalization exemplify political change already afoot in China as a result of economic marketization and growth.

While continued growth cannot be guaranteed, China's leaders have demonstrated an impressive ability to manage the economic difficulties foisted on China by the post-July 1997 Asian crisis. More important, they have demonstrated seriousness and flexibility in pursuing continued economic reform. President Jiang Zemin's policy proposals at the 15th Party Congress, held in September 1997, were bold. Promising to reform moribund state-owned enterprises (SOEs), Jiang reinterpreted the Marxist concept of state ownership of the means of production to include publicly held stocks (by both individuals and other firms). Bankruptcy law, takeovers, mergers and acquisitions - all features of a capitalist economy - received the Party's official blessing. Since then, China has demonstrated a further commitment to reform by reducing housing subsidies and the volume of public employment generally - efforts quite likely spurred on by revelations of structural deficiencies in the "Asian model" that have triggered the region's continuing economic crisis.

It is likely, therefore, that China's economy will grow enough over time to keep the basic question relevant: Will economic growth produce political liberalization? The answer is unclear. For economic growth to produce democratic politics - or at least more liberal politics - a middle class of private property owners who want to get the state off their backs must emerge. To generate such a class, China needs the growth and expansion of market forces, an effective system of property rights protected by the rule of law, and a much reduced role for bureaucratic authority in the economy. Ultimately, too, it needs enough political stability to allow this middle class to emerge, and it will require new political institutions to manage the demands of that class in a way that will not push Party leaders to co-opt it or even crush it before it achieves greater liberalization.

Many signs point to these positive trends, but strong counter-trends are also working against political liberalization despite - and in some cases because of - the rapid economic growth of recent decades. To sort out the evidence, three questions need especially careful examination. First, who will check the enormous power of China's bureaucrats whose authority and personal economic interests depend upon their ability to manipulate market forces? Second, if labor unrest stemming from the current reform of the SOEs threatens social stability and business profits, will managers advocate a more open political system? Third, will China "open" more to the outside world in terms of trade, and what would the social and political consequences of such an opening be?

In my view the answers to these questions do not support current assertions that China is rapidly liberalizing but suggest that the process of change will be slower. Let us take them in turn.

A Rent-Seeking Culture

Many observers assert that powerful political and economic forces are pushing for a continued transition to market capitalism in China. As their argument goes, the decentralizing of economic decision-making authority from the center to the localities, combined with a shift from planned allocation of goods to market allocation, is leading to greater decision-making freedom for individuals and firms. This means, in turn, expanded market activity and, ultimately, a transition to free-market capitalism.

There is a logic to this projection. As enterprise managers pursue greater efficiency, economies of scale and lower transaction costs - i.e., the cost of doing business - they advance liberalization. Firms with comparative advantage in particular products are helping to dismantle regional barriers so that they can expand their markets. When foreign-funded enterprises expand their market share, domestic firms become more competitive and more responsive to market forces - or else they do not survive. Popular hostility toward pervasive corruption is also impelling Chinese leaders to further embrace the market economy. Much of the dual price system has disappeared as more and more goods are exchanged on the open market. AS early as the end of 1992, only 5.9 percent of retail sales, 12.5 percent of agricultural sales, and 18.7 percent of the sale of capital goods came from products priced by the state.(2) The decisions of the 15th Party Congress are likely to accelerate these trends. In particular, with less pressure on banks to prop up inefficient SOEs, markets are likely to play a greater role in the allocation of domestic capital. So there is, indeed, plenty of hopeful news.

But rapid growth alone does not ordain a liberalized economy. How exchanges occur, limits on interregional flows of goods and services, the scope of bureaucratic interference, the scale of transaction costs, and the ability of local state agencies to intervene in economic decision making are all important indicators of where China's economy really rests, and of where it is headed. These indicators suggest that a mixed economy, where decentralization empowers non-democratic forces, is equally likely. China's property rights regime and the ferment of economic development may not be creating a large middle class of private property owners who will seek autonomy from the state. Instead, economic growth without privatization, in a society that has experienced little democracy, could create a semi-private managerial class that does not support democracy. Add to this a strong ethos in China favoring collective interests, and the likelihood of a corporatist China seems far greater than a democratic one.

This likelihood is increased by the cultural reality that economic power in China already rests largely with bureaucrats, as it has for a very long time. The deep involvement of administrators in the economy makes China, above all, a rent-seeking society. "Rent" in this context is defined as the difference between free-market prices and higher prices that exist because regulations limit competitors from entering the market. Regulation acts to limit supply, yielding above-market prices. Rents nourish corruption, as bureaucrats find themselves in a position to charge fees both for services and for selectively ignoring the regulations that they and their colleagues create. The payoffs can be substantial. Higher tariff barriers - another form of rent - insure higher profits than would occur in a non-tariff economy for...