Thursday, December 20, 2012

Why the Party Can’t Fix the Chinese Economy

By Tianlun Jian
Income inequality is commonly recognized as a major hindrance to China’s economic and social stability and continued development. Many have observed with disbelief the level of polarization in China, and wondered what has gone wrong with the system.
Nothing, in fact, went wrong. The state machine has executed precisely the ideas of Deng Xiaoping, the designer of China’s current economic model.
When Deng first laid the framework of economic reforms, his goal was to maintain the rule and absolute power of the Chinese Communist Party (CCP), controlled by a small group of men. At that time, China had just finished the Cultural Revolution, and the economy had been shattered by a decade of chaos.
To pull the CCP out of the mess, Deng knew that he had to grow the economy. But equal opportunity was never part of the plan. He stated clearly that the reforms aimed to “let some people get rich first.” Of course, those in the center of the circle of power, and those close to them, were the “some people” who got rich first.
Corruption grew rampant as officials used every opportunity to abuse political power and thus gain economic benefits. The rapidly widening income gap and inflation created anger at the grassroots level. To protest official corruption, college students took to the streets in 1989 calling for justice and democracy, which ended in the notorious Tiananmen Square massacre.
After the incident, Deng stressed that “development is of overriding importance” and “maintaining stability is the top priority,” in part to justify the massacre. These ideas then became the guiding principles that led to the complete disregard for the well-being of ordinary people.
The fundamental macroeconomic policies of reliance on exports, investment-driven growth, the handing out of monopolies to state-owned enterprises, and low interest rates to plunder wealth from households were all products of these initial ideas.
These macroeconomic principles and their byproducts—including widely discussed issues like the real estate bubble and violent land acquisitions—all served to benefit those with political power.
The most lucrative industries, like energy and telecommunications, are all state monopolies and headed by CCP officials or their family members. The power industry, for example, is controlled by former premier Li Peng’s daughter, while telecommunications are controlled by the son of former Party head Jiang Zemin.
Foreign and domestic investors often have to pay large “consultant fees” to families and friends of officials to gain permits to do business in China, or to gain favorable policies, or sometimes just to avoid trouble.
Loyalty to the CCP and its senior cadres has become the No. 1 consideration in staffing critical positions in China, including the judicial system, the education system, and the media, to ensure that policies are made to protect and maximize the benefits of these interests groups. With the entire state machine designed that way, policies that truly benefit ordinary Chinese and narrow the income gap have little chance to be passed and executed.
Examples abound. Income distribution reform, the abolition of the Hukou residential system that discriminates against people from rural areas, the appreciation of the Chinese yuan, and real anticorruption measures are just a few in a long list of initiatives that have been discussed for years but never implemented. Any of these initiatives, once carried out, will significantly block the way to greater wealth for some powerful people.
It is not realistic to expect the CCP to carry out top-down reforms that will share the spoils with the average Chinese. This is why in the future the last three decades will be seen as a period in which the CCP went further and further into a death spiral.
The Party’s cadres want to benefit from an unjust system while somehow mitigating the anger of the rest of the population. Given that genuine reform is impossible, eventually that anger will catch up with them and the Party will be no more.
With reporting by Pingping Yu.