The China Syndrome

There’s no shortage of Western commentators bigging up China, and predicting that the country will eclipse the West in the future.

How are the United States and Europe going to adjust to a world in which they are no longer the masters? asks Martin Jacques.

If China’s economic growth continues at its current rate it may well mean it will loom larger in the world in the near future but I’m not sure we should assume either scenario is a foregone conclusion.

Older readers may remember when in the 1980’s another East Asian country – Japan – was tipped as the next big thing. There was no shortage of books with titles like ‘Japan as Number One’ and ‘The Coming Superpower’ in academic libraries and bookshops.

But the predictions in these books – that Japan’s historically spectacular postwar economic growth would mean it would soon overtake Europe and the US and lead to an Asian superpower didn’t come to pass.

Why not? In a word – institutional corruption.

Japan’s postwar economy, while fast growing was (and to a lesser extent still is) based on a cosy cartel of giant manufacturing combines, compliant banks, and what can only be described as a democratically elected one party state with intergenerational links to the dominant companies and finance providers.

The potential for kickbacks, pork barrel politics and the stifling of new ideas in such a set up became apparent by the turn of the 1990’s when Japanese growth slowed, halted and went into the precipitous economic decline that continues today.

The 1990’s saw the Nikkei index of leading shares head downwards for over a decade, while in the same period the overinflated land values that had fuelled the Japanese boom collapsed. By the early 1990’s unemployed salarymen set up mini shanty towns in Tokyo parks – an unthinkable sight for those of us who had lived in the country prior to the popping of the Japanese bubble economy at the end of the 1980’s.

The fact of the matter is that sustained economic growth is only guaranteed in a society which provides powerful checks and balances on the power of the dominant economic class. Societies which lack such fetters will always be at risk of catastrophic collapse when the lid can’t be kept on any more.

Postwar Japanese governments swept economic corruption under the carpet and the majority of the governed didn’t complain while their living standards continued to rise. However unpunished corruption has a tendency to perpetuate itself until it becomes too big to ignore. When finally it has to be tackled, the unravelling of it also unravels the mainstays of the economy, leading to economic collapse. That’s essentially what happened in Japan.

China today shares many features in common with pre 1990 Japan. It’s a (constitutionally enshrined) one party state, corruption is rampant, while it’s economy is growing at an unprecedented pace.

Will Hutton takes a thoughtful look at contemporary China in the Guardian and doesn’t like what he sees:

The truth is that China is not the socialist market economy the party describes, nor moving towards capitalism as the western consensus believes. Rather it is frozen in a structure that I describe as Leninist corporatism – and which is unstable, monumentally inefficient, dependent upon the expropriation of peasant savings on a grand scale, colossally unequal and ultimately unsustainable.

It is Leninist in that the party still follows Lenin’s dictum of being the vanguard, monopoly political driver and controller of the economy and society. And it is corporatist because the framework for all economic activity in China is one of central management and coordination from which no economic actor, however humble, can opt out.

I think that’s a fair summary of China today but it’s a situation which makes the economic set up of postwar Japan look like a model of good corporate governance and transparent democracy by comparison.

Here Hutton provides evidence in support of his analysis that China is institutionally corrupt:

Many judges still have no formal legal training – the majority are retired army officers, only too ready to do the party’s bidding. The scale of the corruption is stunning. In 2003, 794 judges were tried for corruption (out of a national total of 200,000).

In 2003 and 2004, the presidents of the provincial high courts of Guangdong and Hunan were both found guilty of corruption. When the party does not or cannot influence the judgment in a case, it can use its influence over the police to decide whether to slow down or not enforce the judgment.

Enforcement rates in China are lamentable; for example, only 40% of provincial high court decisions are enforced. The lack of a clear system of property rights, with the party-state claiming particular privileges, can make debt enforcement against state organisations close to impossible.

There’s much, much more in the article itself, but for reasons of space I’ll confine myself to quoting only one more passage, which illustrates the problem of corruption with a neat analogy with the UK:

High-level officials had been arrested and imprisoned for embezzlement and racketeering; they included the party secretary and mayor of Beijing, Chen Xitong, a member of the Politburo. Cheng Kejie, vice-chairman of the National People’s Congress, was executed for taking pounds 2.5m in kickbacks for arranging land deals and contracts for private business.

In the financial system the highest-profile casualties were three of prime minister Zhu Rongji’s hand-picked “can-do commanders”, selected to sort out the financial crisis of the late 1990s, and one of whom, Li Fuxiang, leaped to his death from the seventh floor of Beijing’s Hospital 304 while under investigation.

To put this in a British context, it is as if the Mayor of London, the speaker of the House of Commons, the chief executive of HSBC, along with a deputy governor of the Bank of England and the deputy chief executive of the Financial Services Authority had all been imprisoned for fraud with one committing suicide.

China’s authorities are absolutely right to be worried about the level of corruption in the state they govern – but there isn’t an awful lot they can do about it. Corruption isn’t something that can be solved by bullets in the back of individual brains because it is actually embedded in the economic and political model they administer.

I sometimes wonder whether those European writers who boost the People’s Republic base their views on wishful geopolitical thinking rather than economic reality.

They seem to hope that the rise of China will provide the world with a powerful political counterbalance to US hegemony. I’m not convinced the Chinese nomenklatura are in a position to fulfil these wishes unless it changes the country out of all recognition in the near future. There’s no sign it can actually do so without destroying it’s own power.