Undemocratic Capitalism

Undemocratic Capitalism

Mini Teaser: Will  the market democratize China? The logic of economic determinism may not be so inexorable after all.

by Author(s): David Zweig

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. 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

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

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
socialstability 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. 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 those who smuggle goods into China.
The Customs Service itself and the People's Liberation Army (PLA) are
two actors that benefit handsomely from the rents arising from tariff

According to Wu Jinglian, a leading Chinese economist, rents created
by the difference between free-market and planned commodity prices,
between the official value of foreign exchange and its free-market
value, and between low official interest rates and the real cost of
money, accounted for 20-25 percent of GNP in 1981-89--a higher rate
than in India or Turkey in the 1960s, both of which are considered
classic rent-seeking societies. Little wonder, argued Wu, that
government-connected Chinese businessmen "try by every means to
maintain the existing rent system and establish a new rent system to
expand the scope of rents."

Also, in the current transitional economy, managers of corporatist
economic structures, army officers, semi-public companies, and mayors
of towns, cities, development zones, and former people's communes
(now called townships), and even Party secretaries in villages
control and manage key sectors in China's developing economy. They
are all rent-seekers in one way or another.

Hence, despite assertions that a growing private sector is creating a
strong middle class, one actually finds severe limits on the role of
the private sector in China's cities. No doubt, the validation of the
private economy as "an important part"--not just a "complementary"
sector--of the national economy at this year's National People's
Congress will create an upsurge in the private sector's role in
China. Many private firms who have worn a collective hat to protect
themselves may, over time, be more willing to admit the private
nature of their property rights. However, private entrepreneurs build
government networks as protection from rapacious bureaucrats who
would otherwise plunder their profits and extort funds for their
local coffers. Such norms of high government interference are,
needless to say, not conducive to the ethic of the free market as we
know it in the West.

Essay Types: Essay