The Lessons From 30 Years of Chinese Reform
China Economic Forum
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Article from: http://online.wsj.com/article/SB122939170030209305.html
By: Hugo Restall
Thirty years ago this week, Deng Xiaoping and the Chinese Communist
Party turned their backs on Maoism and embarked on a reform program
that led to the most remarkable period of wealth creation the world
has ever seen. From today's vantage point this process appears
surprisingly smooth. But it hasn't been, and still isn't.
Above all, there has never been total agreement in Beijing about the
wisdom or course of reform. Nor has there been a clear road map.
Rather, especially under Deng, it was a fairly personal process. He
could launch reform because in 1978 China was in a state of
ideological and economic exhaustion, and internal opposition to
"following the capitalist road" was weak. The adoption of pragmatism
as a guiding principle was popular because people were so fed up with
political campaigns and class struggle.
Deng also played a crucial role as "paramount leader" at key moments
in the 1980s and early '90s, pushing through changes using his
personal prestige when reform seemed to founder. In the early stages,
economic reforms created many winners and very few losers, as private
enterprises started small, coexisting with the state-owned industrial
dinosaurs.
In Deng's famous phrase, China's policy makers adopted a gradualist
approach, "crossing the river by feeling for the stones." Small-scale
experiments often led to success on a national scale, such as allowing
farmers to keep what they produced from private plots and the
establishment of special economic zones along the coast. The major
involvement of foreign enterprises in the Chinese economy was never
planned. It simply evolved. But the lack of a reform blueprint also
led to some notable failures. China's stock market remains
dysfunctional because it started as a no-cost source of money for
state-owned enterprises. Allowing the market to become a viable source
of capital for entrepreneurs would hurt these companies and those who
own their overpriced shares.
This gradualist approach, and the underlying lack of consensus, had
political consequences. During the 1980s, reformist and hard-line
forces within the Communist Party still fought over the pace of
reform, and intellectuals had a modicum of freedom to debate. The
crackdown after the 1989 Tiananmen Square massacre sharply reined in
that debate, but within a few years economic reform and growth were
back on track. By the mid-'90s, the party successfully recast itself
as a collection of society's elites from all backgrounds, including
entrepreneurs. The only competition over policy was between
technocratic elites and leaders of patronage networks, while the
government bought the allegiance of intellectuals with improvements in
their lifestyles.
China became a remarkably laissez-faire economy in the late 1990s and
early 2000s. The government's revenues as a share of GDP shrank to
around 11%, from 31% in 1978. At the same time, Beijing unilaterally
cut tariffs and joined the World Trade Organization, while shrinking
the public sector. In the space of a few years starting in the 1990s,
inefficient, state-owned enterprises shed about one-third of their
workforce, by some estimates 60 million jobs. As a result, for about
three decades the "socialist market economy" churned out double-digit
growth year after year.
Unfortunately this run is coming to an end, and not just because of
the global financial crisis. Today the pendulum is swinging back
toward ideological competition and big government. With the country
still without a true consensus on the virtues of free-market reform,
the communists-turned-capitalists are morphing into European-style
social democrats.
In the late 1990s, the bureaucrats set out to re-establish their
power. Beijing fixed a target of restoring national revenue to 20% of
GDP by improving the tax collection system. Last year, revenue hit
20.8% of GDP, growing by 32.4%, far ahead of economic growth of 11.4%.
Spending has risen just as fast, and this is now part of an
ideological shift back toward statism. Government leaders portray
themselves as the answer to every problem, expressing their
willingness to use public resources to help those left behind by the
new prosperity, rather than counting on new businesses to create jobs.
While China's social safety net remains small in comparison to
European countries, it is expanding rapidly. Given that China remains
a poor country and has a rapidly aging population, this may not be
sustainable.
Meanwhile, after welcoming foreign trade and investment to a degree
seldom seen in a developing country, Beijing is quietly shifting tack
to impose some nontariff barriers to foreign products and investment.
The state is pushing the creation of new national champions,
enterprises that are tied to the government by various ownership
structures and enjoy generous financing from the state-owned banks. A
new labor law goes far beyond basic workplace protections,
incentivizing workers to organize and instigate disputes with
management.
All of this is reducing the opportunities open to the true private
sector, which has been the engine of China's rapid growth. As growth
slows and the politically well-connected cadre managers enjoy the
lion's share of opportunities, inequality and resentment grow. If this
prompts the government to expand spending further to buy off the
discontented, the virtuous cycle of economic reform could turn into a
vicious cycle of ever greater government intervention.
In the political sphere, the close alignment of government and
business elites means that any emerging opposition to the Communist
Party will likely be antibusiness. We already see evidence of this.
Among intellectuals, a nationalist movement advocating greater
government control of the economy -- known as the "new left" -- is the
hottest trend.
None of this means that China is necessarily going to reverse course
after 30 years of reform. But the straight-line projections some have
drawn of the country's growth are too optimistic. The drawbacks of the
Communist Party's monopoly on power are becoming more evident, as
vested interests protect their control of the economy by holding back
development of the banking system and stock market.
The coming year is expected to be critical, both economically and
politically. China's export-dependent economy is especially vulnerable
to a global slowdown. But the Communist Party has shown itself adept
at adjusting to new challenges. We can expect that the feeling for the
stones will continue, even as the pace of reform slows.