China’s Politics of the Economically Possible

CLAREMONT, CALIFORNIA – 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).