March 16th, 2012
04:54 PM ET

Pei: China's politics of the economically possible

Editor's Note: Minxin Pei is a professor of government at Claremont McKenna College.  For more, visit Project Syndicate or follow it on Facebook and Twitter.

By Minxin PeiProject Syndicate.

When sound economic advice is divorced from political reality, it probably will not be very useful advice. The history of multilateral financial institutions like the International Monetary Fund and the World Bank is littered with well-intentioned and technically feasible economic policy prescriptions that political leaders ignored. But that has not stopped these institutions from trying.

The latest attempt is the World Bank’s just-released and much-applauded report China 2030: Building a Modern, Harmonious, and Creative High-Income Society. As far as technical economic advice goes, the report is hard to top. It provides a detailed, thoughtful, and honest diagnosis of the Chinese economy’s structural and institutional flaws, and calls for coherent and bold reforms to remove these fundamental obstacles to sustainable growth.

Unfortunately, while the Bank’s report has laid out a clear economic course that Chinese leaders should pursue for the sake of China, the Bank has shied away from the most critical question: Will the Chinese government actually heed its advice and swallow the bitter medicine, given the country’s one-party political system?

For example, among the most urgent reforms that China 2030 recommends is reduction of the state’s role in the economy. This can be achieved by eliminating privileges for state-owned enterprises (SOEs), such as subsidized capital and monopolies, and by allowing the private sector more freedom. But, curiously, the report’s authors seem to forget that this would entail prohibitive, if not disastrous, costs for the ruling Chinese Communist Party (CCP).

China’s giant SOEs may have some economic usefulness, but their existential value is political. The CCP uses the SOEs to provide good jobs and perks for its members. Of the CCP’s roughly 80 million members, more than five million hold executive positions in state-owned or affiliated firms. Factoring in the regulators and local administrators whose jobs similarly depend on maintaining the current level of state intervention in the economy, World Bank-style reforms would jeopardize probably close to ten million official sinecures.

There is little doubt that reducing the SOEs’ power would make the Chinese economy far more efficient and dynamic. But it is hard to imagine that a one-party regime would be willing to destroy its political base.

Fiscal reform is another urgent priority highlighted by China 2030. China’s highly regressive fiscal system (the poor are taxed more than the wealthy) entails excessive revenues for the central government and relatively little expenditure on social services. In nominal terms, aggregate tax and non-tax revenues collected by both the central and local governments exceed 35% of GDP. But the bulk of the revenues is spent on administration, fixed-asset investment, domestic security, defense, and assorted lavish perks – entertainment, junkets, housing, cars, and high-quality healthcare – for government officials.

China 2030 suggests that China should gradually increase its spending on social services by 7-8% of GDP over the next 20 years. But why should the CCP do so? After all, the overall real taxation level in China is already quite high, which means that doubling social spending from the current level without raising taxes further would require severe cuts in expenditures that chiefly benefit the ruling elites.

The budgetary transparency that the World Bank has recommended will most likely not be realized for the same reason. Current public spending is so skewed toward the ruling elites that the CCP would risk losing its legitimacy should the budget become subject to public scrutiny.

Making China a “harmonious” society – the aim of the report’s advice on reducing inequality – is clearly a desirable goal. However, it is a tired slogan even by Chinese standards. Trotted out by China’s rulers many years ago, the “harmonious society” campaign has yielded, at best, modest changes in policy. The underlying political drivers of social frustration and conflict – disenfranchisement, repression, pervasive official corruption, unaccountable rulers, and predatory state institutions and policies – remain unchanged.

Addressing these fundamental causes of social discontent and unsustainable economic performance requires not advice and pleas to the ruling elites, but a change in China’s political reality that compels those who benefit from the status quo to surrender their privileges for the good of the country.

Only two likely developments could lead to this outcome. One is the political empowerment of the Chinese people. But democratization is currently unlikely, given the CCP’s clear determination to defend one-party rule.

That leaves political change at the mercy of a system-threatening crisis, brought on by China’s failure to tackle the pathologies the World Bank has so ably diagnosed. And, alas, China’s ruling elites are almost certain to dismiss China 2030 as politically undesirable and irrelevant.

The views expressed in this article are solely those of Minxin Pei. 
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Topics: China • Economy

soundoff (9 Responses)
  1. Tony

    You seem to have forgotten (or intentionally omitted) that the World Bank report was co-authored by a government think tank, which shows that at least part of the government is thinking quite seriously about reforms.

    March 16, 2012 at 8:25 pm | Reply
  2. matt

    More than a few US businessmen are not enamored with the Chinese way of capitalism. They hear stories about resource domination in Africa and attempts to open factories in America, and they don't like the trends.

    March 16, 2012 at 8:36 pm | Reply
    • HonoH Tron

      .

      中共賣國 -

      黃金坪島
      绸缎島
      黑瞎子島
      庫頁島
      江心坡
      南坎
      白龍尾島
      蘇岩礁
      弹丸礁
      黄岩島
      中業島
      藏南
      釣魚島
      琉球群島
      蒙古

      .

      April 2, 2012 at 7:05 pm | Reply
  3. j. von hettlingen

    the site is jammed!

    March 17, 2012 at 5:41 am | Reply
  4. j. von hettlingen

    How long can the CCP forge the country's economic destiny? Its popularity has the boom to thank for!

    March 17, 2012 at 5:47 am | Reply
    • j. von hettlingen

      In recent years the central government very often resorts to myopic decisions to address the social and political malaise.

      March 17, 2012 at 5:50 am | Reply
  5. iraqi shiia are thugs

    iraqi shiia are thugs

    moqtada al sadder and mahdi militia the terrorists iraqi shiia let go one usa soldeir that they captured since 2011 and they say we let him go as free well juster !!!!!!why you captured him in the first place you peace of sh it shiia thugs , he was defending you ..why shiia killed many usa people in iraq and iran, becuase they are terrorists thugs...usa should start attacking bashar al asad in syria hizboallah , and iraqi shiia change those thugs and terrorists before we deal with iran, the time is for the shiia to be hit hard so they can give up arm and terrorizim...
    التيار الصدري يفرج عن جندي أميركي

    مقتدى الصدر أمر الجناح العسكري للتيار بالإفراج عن الرقيب هيلز (وكالة الأنباء الأوروبية) أفرج التيار الصدري السبت في بغداد عن أميركي قال إنه جندي محتجز منذ صيف عام 2011، وأوضح أن الافراج جاء "لأسباب إنسانية".
    وقالت النائبة العراقية بالتيار الصدري مهى الدوري إن مقتدى الصدرأمر الجناح العسكري للتيار بالإفراج عن المواطن الأميركي، مضيفة أنه جندي يدعى راندي مايكل هيلز وهو رقيب متقاعد يبلغ من العمر 59 عاما.
    كما ذكر مصدر بالتيار في النجف أن الافراج تم لأسباب إنسانية، لافتا إلى عدم حصول أي مفاوضات مباشرة أو غير مباشرة مع الأميركيين أو أي جانب آخر.
    وأضاف المصدر نفسه أن الإفراج عن المواطن الأميركي يمثل بادرة حسن نية من زعيم التيار مقتدى الصدر للدلالة على "القيم الأخلاقية والإنسانية والعقائدية للمقاومة الإسلامية العراقية".

    وسلم الجندي المفرج عنه إلى بعثة الأمم المتحدة في بغداد التي نقلته إلى السفارة الأميركية، وأكد المتحدث باسم السفارة أن هيلز مواطن أميركي دون تقديم مزيد من التفاصيل.
    وفي تصريحات مقتضبة للصحفيين، قال هيلز إنه أرسل للعراق عام 2003، وعمل بادئ الأمر جنديا لمدة 15 شهرا.

    وأضاف أنه ظل في العراق بصفة مدنية منذ ذلك الحين وحتى يونيو 2011 عندما أخدته عناصر من "اليوم الموعود" رهينة، في إشارة إلى مليشيا لواء اليوم الموعود التابعة لجيش المهدي.

    يُذكر أن وزارة الدفاع الأميركية (بنتاغون) تقول إنه لم يتم إدراج أي فرد من جنودها رهينة بالعراق منذ استعادة رفات آخر جندي مفقود الشهر الماضي.

    March 18, 2012 at 5:26 am | Reply
  6. Royce

    People cannot live whiotut Nature, but nature can live whiotut us. we need to take action before everything was to late. Do not wait until the nature said you are not belong to thin planet.

    April 21, 2012 at 2:56 pm | Reply

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