From the September 28, 2009 Foreign Policy
September 28, 2009
by John Lee
On Sept. 16, the blockbuster film The Founding of a Republic was released to commemorate the 60th anniversary of the founding of the People's Republic of China, which occurs Thursday, Oct. 1. Featuring more than 100 big-name mainland and Hong Kong actors including Jackie Chan and Jet Li, one of the more poignant moments occurs when the actor playing Mao Zedong holds back tears and emotionally proclaims on the eve of the rise of a new and independent country, "The Chinese people have stood up." The film then awkwardly hurries forward to December 1978, when Deng Xiaoping heralds the era of "opening and reform" in the Middle Kingdom.
It is undoubtedly a propaganda film, as would be expected of anything conceived by the Beijing Municipal People's Political Consultative Conference. But the ambitious sweep of events over six decades is a reminder of something else: The reform period since Deng took power will be nearing the completion of its 31st year -- more than half the age of modern China.
This is significant because China's leaders since Deng have been telling the world that the Chinese Communist Party (CCP) will soon relinquish its dominance over the Chinese economy and society, and is assiduously laying the groundwork for fundamental economic and political reform, and eventually democracy -- but only after it recovers from the chaos and destruction of the Mao years. After all, Deng famously declared that democracy was "a major condition that emancipated the mind." But the reform period of 31 years has exceeded Mao's 27 years of terrible rule. The excuse that the party will "let go" its economic and political power but for the ghost of Mao and his terrible legacy is wearing thin.
So, first things first. Why should the party "let go" more power and instead work toward building institutions that will aid political reform and eventually democracy in China? Because in one important respect, authoritarian China is failing: While the Chinese state is rich and the party powerful, civil society is weak and the vast majority of people remain poor.
But aren't China's leaders doing a magnificent job of at least leading the country toward prosperity? After all, since Deng's reforms, Chinese GDP has grown 16-fold. And isn't this ultimately for the benefit of most of the country's people? Not in China's model of investment-led state corporatism hatched after the 1989 Tiananmen protests to preserve the economic power and relevance of the party.
Surprisingly, the greatest contributor to Chinese growth since the 1990s is not net exports but domestically funded fixed investment used to buy machinery or construct buildings and infrastructure such as roads and bridges. For example, this constituted more than half of GDP in 2008 and more than 45 percent of GDP growth in that year. Due to this year's massive $586 billion stimulus, about 75 percent of growth this year -- now touching 8 percent -- has been achieved through state-led fixed investment.
But not just the high reliance on fixed investment is striking. Where the capital goes is also all important. China is unusual in that bank loans -- drawn from its citizens' deposits funneled into state-controlled banks -- constitute about 80 percent of all investment activity in the country. Although state-controlled enterprises produce between one-quarter and one-third of the country's output, they receive more than three-quarters of the country's capital, and the figure is rising. Revealingly, state-controlled enterprises received more than 95 percent of the 2009 stimulus money. The Chinese state sector currently owns at least two-thirds of all fixed assets in the country.
Economic growth in poor countries is meaningful if it manages to raise the standard of living of the majority of citizens. But predominantly state-led models for growth, as in China, usually lead to profound structural inequalities that are difficult to resolve.
Tellingly, China's 50 million to 200 million-person middle class (depending on how we define the term) is the strongest supporter of the party, which is about 75 million strong. These elites comprise the fastest-growing groups wanting to become party members, almost a quarter of whom are professionals and skilled workers, a third students, and another third successful businesspeople. Joining the party has become a lucrative career move. By controlling the most important industries and the bulk of the country's capital (through state-owned banks), as well as by overseeing an extensive system of awards, promotions, and regulation, the CCP continues to control and dispense a dominant share of the country's most valued economic, professional, and intellectual opportunities.
Meanwhile, about 1 billion people are missing out on the fruits of prosperity. The country's "bottom billion" are outsiders to China's state-led model of development. They have little prospect of rising up and suffer under the yoke of frequently corrupt and incompetent rule by China's 45 million local officials. For example, according to a 2005 Chinese Academy of Social Sciences report, more than 40 million households have had their lands illegally seized by corrupt and unaccountable local officials over the past decade. In the 1990s, poverty alleviation slowed dramatically, and since 2000, the numbers of those still in poverty actually doubled in absolute terms. In one generation, China has gone from being the most equal to the most unequal country in all Asia.
It was not always like this. Eighty percent of the hundreds of millions of Chinese who have escaped poverty did so in the first 10 years of reform leading up to the 1989 Tiananmen protests -- before the state retook control of the economy. Across the board, incomes were rising with the tide. There was a decrease in the numbers, discretionary powers, and duties of local officials. Private businesses were outperforming even the best state-controlled ones, and an independent middle class was growing and thriving. Then came Tiananmen, and Beijing halted reforms and changed direction. (Predictably, all of this is left out in The Founding of a Republic.)
The planned celebrations in Beijing and other cities will no doubt be spectacular. But as the planned military parade, showcasing five types of domestically designed missiles, and other festivities take place, the power of the state will also be on show. There will be a huge People's Armed Police and People's Liberation Army contingent there just in case protesters make an appearance. Snipers will line the tops of buildings along the designated parade path. October 1 will demonstrate the party's success in holding onto power and the strength and wealth of the Chinese state, but not that of its people.
China needs to build institutions -- and especially promote the rule of law, accountability, and transparency -- and the state needs to take its hands off the levers of economic power. The party knows full well that these conditions will likely lead to political reform and are therefore resisting change. But if that occurs, then the Chinese people -- and not just the state -- will have much more to celebrate next time.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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