On Point: China's Toughest Economic Problem Is Political

by Austin Bay
October 8, 2013

In an October 7 speech given at the Asia-Pacific Economic Cooperation (APEC) summit, Chinese President Xi Jinping stated that a full and healthy global economic recovery from this century's great recession would be a "long and tortuous process." According to Jinping, the global economy is experiencing a profound readjustment as the major economies struggle with their "structural problems." The Chinese leader advocated macro-economic cooperation among the world's leading economies.

"Structural problems" is a diplomatic expression for the numerous large-scale (macro) economic ills everyone bewails but that are just so darn politically difficult to correct. U.S. structural problems would include enormous public debt, aging infrastructure and increasing administrative compliance costs resulting from complex tax laws and proliferating business regulations.

Jinping didn't mention a peculiar economic burden his nation bears: the Communist Party, of which he is certainly a member. In the heyday of Chinese Communism, the Party was the law and ruled by diktat. Rule by dictatorial whim is a form of lawlessness, a lawlessness strictly enforced with bayonets.

Though Communist Party cronyism and corruption may not quite fit an academic definition of a structural economic problem, in China's case their systemic effects are large. Corruption and cronyism are the foremost political and economic complaints in China. The Chinese people know that clever and adaptive Party apparatchiks tilt the economic field to favor apparatchik cronies. The worst violators use state power to gain control of resources or to threaten a business rival. That's corrupt.

At least once a year Beijing proclaims a crackdown on corruption. Occasionally authorities arrest and convict a particularly flagrant Party crook. China's disaffected hundred millions, however, contend the crackdowns are haphazard. Foreign companies operating in China report they still face undue difficulties when attempting to enforce a contract dispute. In China the Rule of Law is still, at best, fragile.

China's great economic renaissance began when Deng Xiaoping said that creating a modern China required "opening and reform." Xiaoping hedged on the precise definition of "opening and reform." In 1989 he sent tanks and infantry to Tiananmen Square to demonstrate that the process had severe limitations.

But micro-economic innovation? Xiaoping sought a micro-economic revolution. Xiaoping wanted Chinese entrepreneur's to fulfill what economist Joseph Schumpeter dubbed the entrepreneur's function: "to reform or revolutionize the pattern of production." The micro-economic opportunity, however, came with the Tiananmen restriction: The Party must remain supreme.

China's first-generation entrepreneurs of micro-economic innovators pulled it off. In 1980 China had a GDP of about $190 billion. In 1998, the year after Xiaoping died, China's GDP topped $1 trillion. In 2013 China has the world's second largest economy, with a GDP of over $7 trillion.

Wei Gu is The Wall Street Journal's "China Wealth and Luxury editor" -- and in 1980 who'd have predicted that job? In a recent article titled "China's Second-Generation Entrepreneurs A Different Breed," Wei Gu reported that the "foreign educated" children of Chinese entrepreneurs are not enthralled with "the endless wining and dining of government officials that is necessary to do business in China." In China, since personal whim still trumps law, businesspeople must constantly curry favor with government officials. It amounts to micro-economic lobbying.

Wei Gu wonders if "second generation" Chinese businesspeople, many of them operating quite substantial industries, will test Party control. Over a decade ago, at a Washington colloquy, I heard a Chinese political expert speculate that young Chinese businesspeople (like Wei Gu describes) are the logical allies of Chinese democratic political modernizers. Both groups understand the economic benefits of a reliable legal system. However, the process of implementing the Rule of Law still remains "long and tortuous."


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