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January 23, 2012 8:35 pm
In most societies, dating the start of reform is easy, but pinning down its demise is not. Such appears to be the case with post-Mao China. Few would dispute that reform began in 1978 when Deng Xiaoping returned to power. Fewer still would disagree that reform was re-energised 20 years ago when Deng, alarmed by the prospect of economic stagnation and regime collapse, made his historic tour of southern China and forced the Chinese Communist party to liberalise the economy and embrace capitalism unabashedly.
As China marks the 20th anniversary of Deng’s history-changing tour, the most ironic fact – and perhaps China’s worst-kept secret – is that pro-market economic reform in China has been dead for some time.
Evidence of the demise of economic reform is easy to spot. The Chinese state has reasserted its control over the economy. Big state-owned enterprises dominate nearly all the critical sectors, such as banking, finance, transport, energy, natural resources and heavy industry. The private sector, a victim of persistent official discrimination, is in full retreat. Critical prices, such as interest rates and land, are officially controlled and severely distorted. Foreign businesses, once welcomed with open arms, are getting squeezed with protectionist measures. The overall orientation of the Chinese economy has veered so much off the reformist path that foreign business leaders who have long been supportive of China are now voicing their bitter disappointments, some publicly. China’s main western trading partners do not need to read scholarly analysis to know that there is no pulse in its reform. All they need to do is to listen to their business community, check their trade statistics with China, and take a look at Chinese economic policy.
Dating the demise of Chinese reform is perhaps impossible, mainly because no single event in the past two decades marked its passing. It suffered the death by a thousand cuts – small but consequential steps taken by Beijing that have gradually reversed the direction of the Chinese economy. In all likelihood, China’s reform died in the last decade, following the country’s entry into the World Trade Organisation (so much for the prognostication that WTO accession would spur reform). Because of its powerful investment-driven growth momentum, China has managed to keep economic growth high in spite of the lack of reform for a decade. Of course, the country has paid a huge price, such as huge structural imbalances, chronic inefficiency and poor sustainability.
One may be tempted to blame leadership failure for the premature demise of China’s reform. While this is certainly a cause, a far more critical factor is more responsible: the CCP’s political objective of reform is fundamentally incompatible with a market economy.
No one understood why China needed to reform its economy better than Deng himself. In 1992, as in 1978, He knew that only market-oriented reforms could save the CCP. Although Deng was sure about the political objective of his reforms, he never explicitly endorsed a capitalist market economy as the end goal. Here lies the fundamental flaw of China’s reform project: as long as pro-market reforms are used as a means to preserve the political monopoly of the CCP, such reforms are doomed to fail.
First, since reform is crisis-driven, its achievements are bound to, paradoxically, reduce the pressure for continuing the reform. The moment the CCP’s rule is more secure due to improved economic performance, its ruling elites would lose incentives for further reform. That is why during the previous decade we observed the phenomenon of growth without reform.
Second, the CCP is no ordinary ruling party. It is a sprawling political patronage system filled with self-interested individuals eager to cash in their political investments. The conversion of political power into economic privileges and profits is far easier in an economy heavily controlled by the state than in a more market-oriented one. As a result, the interests of the ruling elites are in conflict with the imperatives of market reforms. Seen from the opposite angle, this logic illuminates the systemic cause of China’s “crony compitalism” – the marriage of power and wealth is made possible only when a post-communist autocracy is in charge of a half-reformed economy.
Since reform is no more, one has to wonder why Beijing bothers to commemorate Deng’s southern tour at all.
The writer is a professor of government at Claremont McKenna College
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