Friday, November 28, 2014

China’s Plenum Test

TOKYO – There is something odd and disturbing about the conventional wisdom surrounding the upcoming Third Plenum of the 18th Central Committee of the Chinese Communist Party (CCP). As the November 9-12 conclave draws near, the international community’s attention seems to be focused mainly on technocratic policy changes deemed essential to restructuring China’s state-dominated economy and reenergizing growth.

Will the government liberalize interest rates or loosen capital controls? How will the fiscal system be revamped? Will land reform be part of the package?

The list of such questions goes on. Outside China, the prevalent view among business leaders is that President Xi Jinping’s new administration has consolidated its power and acquired enough authority to push through far-reaching economic reforms. He and his colleagues need only to get the specific policies right.

On the surface, such thinking may seem reasonable. In China’s top-down political system, a unified leadership is seen as fully capable of forcing the bureaucracy to comply with its wishes. With Xi’s anti-corruption campaign in full swing, and the example of Bo Xilai’s imprisonment serving as a warning to the new president’s adversaries (no matter how senior they are), Chinese officials at all levels, it is widely believed, are likely to toe the line.

Unfortunately, this view is both too sanguine and naïve. It overestimates the effectiveness of anti-corruption campaigns in contemporary China (there have been many in the last three decades), and it overlooks the political sources of the country’s economic slowdown. While Xi’s efforts to cleanse the rot inside the Chinese party-state should be applauded, it is no less important to recognize their limits.

So far, Xi’s campaign has remained a conventional affair involving selective prosecution. Given the central government’s well-known inability to enforce its policies at the local level and the prevalence of tight-knit patronage networks in Chinese provinces and cities, it is unrealistic to expect that the current anti-corruption drive will produce significantly better results than in the past.

Indeed, the fight against corruption is at war with itself, because Xi is simultaneously seeking to buttress one-party rule. But it is precisely the absence of effective checks on the exercise of power that encourages and sustains rampant corruption in the first place.

Optimism about the CCP’s ability to push through market-oriented reforms also ignores the real obstacles to future growth and prosperity, which do not include a lack of economic ideas or policy expertise; on the contrary, it is well known – even obvious – what kind of economic reforms are needed.

What prevents China from pursuing these reforms is a combination of opposition from powerful entrenched interest groups – state-owned enterprises, local governments, the economic-policy bureaucracy, and family members of political elites and well-connected businessmen – and flawed political institutions. Unless Xi and his colleagues demonstrate their resolve to overcome such opposition and launch comprehensive reforms, their chances of success are not high.

Compared with the two previous breakthroughs in reforming China’s economy, in 1978 and 1992, Xi faces a different environment and a much tougher challenge. Opponents of Deng Xiaoping’s reforms were ideologically driven; they had no personal stake in the Maoist political economy. Defeating them required building a winning coalition within the party, discrediting the communist ideology, and rallying public support, all of which Deng did.

Today, by contrast, members of the ruling elite benefit directly and immensely from the state-dominated economy. Market-oriented reform, by leveling the competitive playing field, would hurt their interests and reduce their privileges, making fierce opposition likely. Only by mobilizing pressure outside the party-state can these insiders be forced to accept some of the decentralizing and liberalizing reforms that China’s economy needs.

At that point, China will have a better chance of improving its legal institutions, increasing political accountability, strengthening protection of private property rights, and making the government genuinely – in Mao’s words – “serve the people.” Without real and significant political change, technocratic reform proposals will treat only the symptoms of China’s economic malaise, without addressing its underlying institutional causes.

In assessing the outcome of the Third Plenum, what observers should really be looking for is evidence of a bold strategy for political reform. If Xi and his colleagues produce no credible sign of such a commitment, everything else will be eyewash – and skepticism about China’s fate under their leadership eventually will be vindicated.

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    1. CommentedRobert Wolff

      The Great Lamentation -

      Apparently the Chinese are having the same 'Problem' as Americans.

      The former US 'Establishment' as defined by the Republicans has already been defeated by the Unified Power of Washington and NYC.

      I DO have a predictive handle on where America is going, based on the centralization of socio-economic control by Financial institutions and Washington working together to control the evolution of the American nation. Many books (see newly published “Dollarocracy”) are out now about the collusion of Washington Politics and New York Finance now resulting in a Unified Power that controls the nation for profit – no different than what multinationals have done in Africa and Asia – with less than no regard for their impact on local populations. The fundamental political dynamic in America is now the Juggernaut of the centrally controlled Unified Power against the hopeless resistance of locales it decides to take over and dominate for the benefit of those in power who operate from remote locations of power (NYC, Washington).

      The socio-economic evolution to centrally controlled commerce and law that supports its dominance has eliminated the democratic forces of community based socio-economies. Communities are now exploited from afar for profits for the benefits of a few who control the political/financial Unified Power that profits from them.

      We ARE experiencing the same phenomenon the Pashtuns in Waziristan suffered under the rule of the Pakistani Elites. In the final hour it resulted in the organization and rise of the militant Taliban and ultimately Al Qaeda – and the elimination of the Pakistani Elites from power in favor of a fervish attempt to restore a democracy that can settle the ongoing military conflicts and political assassinations in Pakistan. Drone strikes on Taliban leaders inside Pakistan by the US are the condoning expression of not only the tactics and strategies of the former Elites of Pakistan, but taking up the same sword by the US since the Elites have been eliminated – exactly the same motive that got US into Vietnam when the French gave up the fight against the Viet Cong.

      The Juggernaut marches on.

      The current lamentation of the War Baby and Baby Boomer generations of the dramatic change in America that has happened in their lifetimes – the centralized control of Americans under the Unified Power of politics and money, as those community forces have vanished that used to be the dominant force in American Political Life – only presages the hopelessness of the X Generation and beyond to resist the forces to which the current retiring generations gave up their Democracy. That Democracy within our own nation which was purportedly “Of the People, by the People, For the People” has PERISHED FROM THE EARTH.

      We owe future generations of Americans an apology.

    2. CommentedEdward Campbell

      I stopped attending Christian church because of foppish moralizing. I needn't waste time on the same self-righteous crappola in the pages of what professes to be a source of up-to-date political economy.

      Understanding and, gasp, aiding progressive change in any nation presumes an attitude rooted in something more than Cold War agitprop.

    3. CommentedJohn Shin

      In order to grapple with the institutional challenges facing China as explained by Minxin Pei, the CCP leadership and the Chinese society need a framework to fall back. Unfortunately, China's social organization, with its capitalist-dictatorship hybrid basis, has not yet borne out the requisite stages of arriving at a consensus on the future. The kinds of far-reaching reforms for China imagined by Professor Pei will fail to arrive anytime soon.

    4. CommentedJen PeiWeng

      Mr. Pei
      I share your views about today’s China needs on Xi’s anti-corruption campaign; the establishment of efficient checks on the exercise of power; lack of economic ideas or policy expertise; lack of knowledge on what kind of economic reforms are needed; various opposition powers against the possible decentralizing and liberalizing reforms; flawed political institutions…etc
      Yes! It is true that China need to solve as much problems they are facing as possible. It is not easy to explore in details of the problems and/ or difficulties one by one. However it leads to a rather pessimistic outlook for 3rd plenum of 18th CPC congress, could you, base on what introduced by your article, give us your estimate on:
      1. Could China restructure economy from over-weighted on trading or China will continue export oriented economy?
      2. What kind of growth will China achieve in following 5 years? 7.5% is impossible to pursue?