The Paradox of China’s Reform

NEW YORK – The compelling drama of former Chongqing Communist Party chief Bo Xilai’s ouster amid allegations of corruption and murder, and of blind Chinese human-rights advocate Chen Guangcheng’s dash to safety in the US Embassy in Beijing, are more than just fascinating narratives of venality and courage. Unless China can purge the thousands of corrupt Party leaders like Bo, and empower people – like those Chen represents – who have been left behind or harmed by rapid growth, its economy will increasingly suffer.

Like the Asian Tiger economies before it, China has excelled in the first phase of capitalist economic growth, benefiting from massive infusions of capital, low-cost labor, intellectual-property theft, and centralized planning. And, like many of them, China is now facing a “middle-income trap”: as wages rise, its low-end manufacturing is losing global competitiveness while government policies, endemic corruption, and dominant state-owned enterprises are stifling the type of private-sector innovation that China needs most to generate products and services with higher added value.

China’s leaders understand this, which is why the government’s 12th Five-Year Plan calls for a gradual opening up of the Chinese economy. Likewise, a Chinese government think tank worked with the World Bank to produce the China 2030report, which outlines the structural reforms needed to strengthen the foundations of the country’s market-based economy and create a climate of open innovation.