The End of the Beijing Consensus
China Economic Forum
Article from: http://www.foreignaffairs.com/articles/65947/the-end-of-the-beijing-consensus
By Yang Yao
Since China began undertaking economic reforms in 1978, its economy
has grown at a rate of nearly ten percent a year, and its per-capita
GDP is now twelve times greater than it was three decades ago. Many
analysts attribute the country's economic success to its
unconventional approach to economic policy -- a combination of mixed
ownership, basic property rights, and heavy government intervention.
Time magazine's former foreign editor, Joshua Cooper Ramo, has even
given it a name: the Beijing consensus.
But, in fact, over the last 30 years, the Chinese economy has moved
unmistakably toward the market doctrines of neoclassical economics,
with an emphasis on prudent fiscal policy, economic openness,
privatization, market liberalization, and the protection of private
property. Beijing has been extremely cautious in maintaining a
balanced budget and keeping inflation down. Purely redistributive
programs have been kept to a minimum, and central government transfers
have been primarily limited to infrastructure spending. The overall
tax burden (measured by the ratio of tax revenue to GDP) is in the
range of 20 to 25 percent. The country is the world's second-largest
recipient of foreign direct investment, and domestically, more than 80
percent of its state-owned enterprises have been released to private
hands or transformed into publicly listed companies. Since the Chinese
Communist Party (CCP) lacks legitimacy in the classic democratic
sense, it has been forced to seek performance-based legitimacy
instead, by continuously improving the living standards of Chinese
citizens. So far, this strategy has succeeded, but there are signs
that it will not last because of the growing income inequality and the
internal and external imbalances it has created.
The CCP's free-market policies have, predictably, led to major income
disparities in China. The overall Gini coefficient -- a measure of
economic inequality in which zero equals perfect equality and one
absolute inequality -- reached 0.47 in 2008, the same level as in the
United States. More disturbing, Chinese city dwellers are now earning
three and a half times as much as their fellow citizens in the
countryside, the highest urban-rural income gap in the world.
How, then, has the Chinese government been able to adopt the
principles of neoclassical economics while still claiming Marxism as
its ideological anchor? The answer is that China has for three decades
been ruled by a disinterested government -- a detached, unbiased
regime that takes a neutral stance when conflicts of interest arise
among different social and political groups. This does not mean that
Beijing has been devoid of self-interest. On the contrary, the state
is often predatory toward citizens, but its predation is "identity-
blind" in the sense that Beijing does not generally care about the
social and political status of its chosen prey -- unlike many
governments elsewhere that act to protect and enrich specific social
or political groups. As a consequence, the Chinese government has been
more likely than other authoritarian regimes to adopt growth-enhancing
policies.
For the last 30 years, the CCP has intentionally adopted policies
favoring specific groups or regions to promote reform and economic
growth. It has helped that the disinterested CCP government was not
permanently beholden to certain groups or regions. China's integration
into the world economy is a case in point. At the end of the 1970s,
the United States was eager to bring China into its camp as a buffer
against Soviet hegemony, and China quickly grasped the opportunity.
Yet that early adoption of an "open-door" policy gave rise to domestic
resistance: special economic zones, such as Shenzhen, enjoyed an
abundance of preferential treatments that other parts of the country
envied. Moreover, the CCP's export-led growth model required that
Beijing embrace an unbalanced development strategy that encouraged
rapid growth on the country's east coast while neglecting the
interior; today, nearly 90 percent of China's exports still come from
the nine coastal provinces.
China's accession to the World Trade Organization in 2001 was also a
calculated move. Before accession, it was widely believed that China
would have to endure painful structural adjustment policies in many
sectors in order to join the WTO. Even so, the central government
actually accelerated negotiations with the organization's members.
Despite the burdens it placed on the agriculture and retailing
sectors, accession boosted China's exports, proving wrong those who
worried about its effects. Between 2002 and 2007, Chinese exports grew
by an annual rate of 29 percent, double the average rate during the
1990s.
China's astronomic growth has left it in a precarious situation,
however. Other developing countries have suffered from the so-called
middle-income trap -- a situation that often arises when a country's
per-capita GDP reaches the range of $3,000 to $8,000, the economy
stops growing, income inequality increases, and social conflicts
erupt. China has entered this range, and the warning signs of a trap
loom large.
In the last several years, government involvement in the economy has
increased -- most notably with the current four-trillion-yuan ($586
billion) stimulus plan. Government investment helped China reach a GDP
growth rate of nearly nine percent in 2009, which many applaud; but in
the long run, it could suffocate the Chinese economy by reducing
efficiency and crowding out more vibrant private investment.
The economy currently depends heavily on external demand, creating
friction among major trading partners. Savings account for 52 percent
of GDP, and consumption has dropped to a historic low. Whereas
governments in most advanced democracies spend less than eight percent
of government revenue on capital investment, this figure is close to
50 percent in China. And residential income as a share of national
income is declining, making the average citizen feel poorer while the
economy expands. As the Chinese people demand more than economic gains
as their income increases, it will become increasingly difficult for
the CCP to contain or discourage social discontent by administering
the medicine of economic growth alone.
Despite its absolute power and recent track record of delivering
economic growth, the CCP has still periodically faced resistance from
citizens. The Tiananmen incident of April 5, 1976, the first
spontaneous democratic movement in PRC history, the June 4 movement of
1989, and numerous subsequent protests proved that the Chinese people
are quite willing to stage organized resistance when their needs are
not met by the state. International monitoring of China's domestic
affairs has also played an important role; now that it has emerged as
a major global power, China is suddenly concerned about its legitimacy
on the international stage.
The Chinese government generally tries to manage such popular
discontent by providing various "pain relievers," including programs
that quickly address early signs of unrest in the population, such as
reemployment centers for unemployed workers, migration programs aimed
at lowering regional disparities, and the recent "new countryside
movement" to improve infrastructure, health care, and education in
rural areas.
Those measures, however, may be too weak to discourage the emergence
of powerful interest groups seeking to influence the government.
Although private businesses have long recognized the importance of
cultivating the government for larger profits, they are not alone. The
government itself, its cronies, and state-controlled enterprises are
quickly forming strong and exclusive interest groups. In a sense,
local governments in China behave like corporations: unlike in
advanced democracies, where one of the key mandates of the government
is to redistribute income to improve the average citizen's welfare,
local governments in China simply pursue economic gain.
More important, Beijing's ongoing efforts to promote GDP growth will
inevitably result in infringements on people's economic and political
rights. For example, arbitrary land acquisitions are still prevalent
in some cities, the government closely monitors the Internet, labor
unions are suppressed, and workers have to endure long hours and
unsafe conditions. Chinese citizens will not remain silent in the face
of these infringements, and their discontent will inevitably lead to
periodic resistance. Before long, some form of explicit political
transition that allows ordinary citizens to take part in the political
process will be necessary.
The reforms carried out over the last 30 years have mostly been
responses to imminent crises. Popular resistance and economic
imbalances are now moving China toward another major crisis. Strong
and privileged interest groups and commercialized local governments
are blocking equal distribution of the benefits of economic growth
throughout society, thereby rendering futile the CCP's strategy of
trading economic growth for people's consent to its absolute rule.
An open and inclusive political process has generally checked the
power of interest groups in advanced democracies such as the United
States. Indeed, this is precisely the mandate of a disinterested
government -- to balance the demands of different social groups. A
more open Chinese government could still remain disinterested if the
right democratic institutions were put in place to keep the most
powerful groups at bay. But ultimately, there is no alternative to
greater democratization if the CCP wishes to encourage economic growth
and maintain social stability.