China
September 14, 2004
Holding China Together
By Sam Wilkin, Editor in Chief
[printer-friendly version]
In their new book Holding China Together (Cambridge, 2004), Barry Naughton and Dali Yang assemble a formidable team of specialists to peer into the black box of Chinese politics. Herewith a review and the implications for China’s future.
“Municipal officials in Guangdong Province were informed that (to save farmland lost to burial plots) the proportion of cadavers cremated would be designated a Key Performance Indicator and tied to compensation.” – Holding China Together, page 24.
William Greider called China a “black box” in which one can find ample proof for just about any expectation. To see the truth in this look no further than the recent China literature, divided into two opposing and indeed contradictory camps.
On the one side are books like William Overholt’s The Rise of China or Ross Terrill’s The New Chinese Empire. In such books China is a coming political and economic superpower – indeed, the main threat to US global dominance and perhaps even US security. (To wit: China Attacks.)
On the other side is Gordan Chang’s The Coming Collapse of China. And academic works such as The Chinese Economy in Crisis and China Deconstructs. In this alternate universe, the “China threat” comes not from the country’s rising military power, but from the likelihood of an Indonesia-style meltdown or unmanageable political disintegration.
In a new book, Holding China Together, Barry Naughton and Dali Yang open the lid on the black box of Chinese politics. The result is sometimes dull – an endless barrage of statistics and detail. But, in contrast to the hysteria of China forecasts made via anecdote, this book reveals the hidden mechanisms by which Chinese politics actually works.
What quickly emerges is that the horror stories from the “China disintegrates” camp are not wholly without merit. The end of communist central control often creates a vacuum in which destructive forces thrive. Witness the political collapse of the former Yugoslavia; or the economic collapse of Russia.
No less in China. Economic liberalization caused the Chinese government to lose control of the country’s economy. The central government’s tax take fell from 40 percent of national output in the 1980s to 11 percent by 1995. Not due to tax cuts – even in famously tax-averse America, the tax share of GDP is 23 percent – but because the central government was losing its grip. Finance Minister Liu Zhongli sounded the alarm: “when the government does not have money, its words no longer count.”
Just as in Russia, declining central control revealed citizens’ capacity for greed. Corruption is always hidden and hard to document. But a clever reading of Chinese statistics reveals some shocking examples. In Shanxi Province, “energy fund” fees of some 280 million yuan were levied on coal exports. But official records reveal only 15 million yuan was actually collected. An astonishing 95 percent of the revenues went missing thanks to official corruption.
Facing dysfunction on that scale, how did China survive? The answer, the scholars in the book contend, is that the Communist Party maintained its integrity and control. Not through charismatic leadership or high-profile official doctrine – which is why trying to read the tea leaves of China’s leadership struggles provides so little insight. But rather, through a robust personnel management system, operating everywhere and always behind the scenes.
This may seem unglamorous. But it is also effective. Although the Communist Party, Chinese government, and People’s Congresses are officially separate, in practice, the Communists retained control over almost all government hiring and promotion.
This gave the Party a powerful tool to counter the threat of disintegration. When economic liberalization threatened to undermine central control, the Party created an elaborate transfer system to prevent any provinces from getting out of line. Scholar Zhiyue Bo documents sixty-nine cases of transfers of top-level provincial leaders between 1990 and 2002 – roughly the equivalent of the US president stepping in to swap the governor of Illinois for the governor of Michigan. Odd, but an effective means of nipping in the bud any single province’s growing political clout.
The Party also created an elaborate set of performance indicators and rewards. For instance, local Party leaders were evaluated on whether they had increased grain output, added infrastructure, and kept down population growth. Township governments were evaluated on increases in industrial profits, increasing sales of pigs, building more Party organizations, and maintaining public order, among other factors.
And the rewards for good performance were substantial. Susan Whiting finds that in Songjiang County, the Party leaders of the best-run town had salaries that were 66 percent higher than the worst-performing towns. Near Shanghai, she unearths the case of a village Party secretary who presided over an output decline and had his income docked from 6,000 yuan to 2,950.
Holding China Together documents another means of central control, also understated but also crucial. That is, institutional change. Fubing Su records the repeated failure of efforts by Beijing officials to shut down small coal mines to reduce excess coal production. Local officials, protecting their local mines, would go so far as to dynamite the mines shut when Beijing’s inspectors arrived and then dig them out again as soon as the inspectors departed. Beijing finally solved the problem by reclassifying revenue from large national mines as local revenue, giving local officials the incentive to protect the large mines instead of the small ones.
As the details add up, it becomes clear that those worrying about a disintegrating China can relax. The mechanisms of government are unspectacular but they work, a story told again and again across provinces and industries. Even in the chaos of the mid-1990s, there was little real cause for alarm regarding China’s political unity.
But Holding China Together is less reassuring on another question: the country’s economic stability. Dali Yang documents a sophisticated remaking of the central bank in his chapter on economic governance. And he and Yanzhong Huang examine cross-province data and show that as China’s bureaucracy becomes more sophisticated, it is able to take a more nuanced route to achieving the center’s goals – in this case, population control.
But what emerges again and again in the book is that China’s economy is spectacularly politicized. Economic problems often result from local Party officials disobeying the center; and these problems are solved by political means – new performance targets, for example, or altering political institutions.
To be sure, the Party has not slipped up yet. China sailed through the Asian financial crisis unscathed. But when the economy hits a true rough patch, are inherently clumsy political responses – Susan Whiting dubs them “high-powered incentives” – going to make the country’s economic problems better or worse? China is holding together. Whether it will stay on course remains to be seen.
[Holding China Together is now available from Amazon. As is Dali Yang’s other new book, Remaking the Chinese Leviathan: Market Transition and the Politics of Governance in China. And, Editorials will be on vacation next week. – Ed.]
[printer-friendly version]
In their new book Holding China Together (Cambridge, 2004), Barry Naughton and Dali Yang assemble a formidable team of specialists to peer into the black box of Chinese politics. Herewith a review and the implications for China’s future.
“Municipal officials in Guangdong Province were informed that (to save farmland lost to burial plots) the proportion of cadavers cremated would be designated a Key Performance Indicator and tied to compensation.” – Holding China Together, page 24.
William Greider called China a “black box” in which one can find ample proof for just about any expectation. To see the truth in this look no further than the recent China literature, divided into two opposing and indeed contradictory camps.
On the one side are books like William Overholt’s The Rise of China or Ross Terrill’s The New Chinese Empire. In such books China is a coming political and economic superpower – indeed, the main threat to US global dominance and perhaps even US security. (To wit: China Attacks.)
On the other side is Gordan Chang’s The Coming Collapse of China. And academic works such as The Chinese Economy in Crisis and China Deconstructs. In this alternate universe, the “China threat” comes not from the country’s rising military power, but from the likelihood of an Indonesia-style meltdown or unmanageable political disintegration.
In a new book, Holding China Together, Barry Naughton and Dali Yang open the lid on the black box of Chinese politics. The result is sometimes dull – an endless barrage of statistics and detail. But, in contrast to the hysteria of China forecasts made via anecdote, this book reveals the hidden mechanisms by which Chinese politics actually works.
What quickly emerges is that the horror stories from the “China disintegrates” camp are not wholly without merit. The end of communist central control often creates a vacuum in which destructive forces thrive. Witness the political collapse of the former Yugoslavia; or the economic collapse of Russia.
No less in China. Economic liberalization caused the Chinese government to lose control of the country’s economy. The central government’s tax take fell from 40 percent of national output in the 1980s to 11 percent by 1995. Not due to tax cuts – even in famously tax-averse America, the tax share of GDP is 23 percent – but because the central government was losing its grip. Finance Minister Liu Zhongli sounded the alarm: “when the government does not have money, its words no longer count.”
Just as in Russia, declining central control revealed citizens’ capacity for greed. Corruption is always hidden and hard to document. But a clever reading of Chinese statistics reveals some shocking examples. In Shanxi Province, “energy fund” fees of some 280 million yuan were levied on coal exports. But official records reveal only 15 million yuan was actually collected. An astonishing 95 percent of the revenues went missing thanks to official corruption.
Facing dysfunction on that scale, how did China survive? The answer, the scholars in the book contend, is that the Communist Party maintained its integrity and control. Not through charismatic leadership or high-profile official doctrine – which is why trying to read the tea leaves of China’s leadership struggles provides so little insight. But rather, through a robust personnel management system, operating everywhere and always behind the scenes.
This may seem unglamorous. But it is also effective. Although the Communist Party, Chinese government, and People’s Congresses are officially separate, in practice, the Communists retained control over almost all government hiring and promotion.
This gave the Party a powerful tool to counter the threat of disintegration. When economic liberalization threatened to undermine central control, the Party created an elaborate transfer system to prevent any provinces from getting out of line. Scholar Zhiyue Bo documents sixty-nine cases of transfers of top-level provincial leaders between 1990 and 2002 – roughly the equivalent of the US president stepping in to swap the governor of Illinois for the governor of Michigan. Odd, but an effective means of nipping in the bud any single province’s growing political clout.
The Party also created an elaborate set of performance indicators and rewards. For instance, local Party leaders were evaluated on whether they had increased grain output, added infrastructure, and kept down population growth. Township governments were evaluated on increases in industrial profits, increasing sales of pigs, building more Party organizations, and maintaining public order, among other factors.
And the rewards for good performance were substantial. Susan Whiting finds that in Songjiang County, the Party leaders of the best-run town had salaries that were 66 percent higher than the worst-performing towns. Near Shanghai, she unearths the case of a village Party secretary who presided over an output decline and had his income docked from 6,000 yuan to 2,950.
Holding China Together documents another means of central control, also understated but also crucial. That is, institutional change. Fubing Su records the repeated failure of efforts by Beijing officials to shut down small coal mines to reduce excess coal production. Local officials, protecting their local mines, would go so far as to dynamite the mines shut when Beijing’s inspectors arrived and then dig them out again as soon as the inspectors departed. Beijing finally solved the problem by reclassifying revenue from large national mines as local revenue, giving local officials the incentive to protect the large mines instead of the small ones.
As the details add up, it becomes clear that those worrying about a disintegrating China can relax. The mechanisms of government are unspectacular but they work, a story told again and again across provinces and industries. Even in the chaos of the mid-1990s, there was little real cause for alarm regarding China’s political unity.
But Holding China Together is less reassuring on another question: the country’s economic stability. Dali Yang documents a sophisticated remaking of the central bank in his chapter on economic governance. And he and Yanzhong Huang examine cross-province data and show that as China’s bureaucracy becomes more sophisticated, it is able to take a more nuanced route to achieving the center’s goals – in this case, population control.
But what emerges again and again in the book is that China’s economy is spectacularly politicized. Economic problems often result from local Party officials disobeying the center; and these problems are solved by political means – new performance targets, for example, or altering political institutions.
To be sure, the Party has not slipped up yet. China sailed through the Asian financial crisis unscathed. But when the economy hits a true rough patch, are inherently clumsy political responses – Susan Whiting dubs them “high-powered incentives” – going to make the country’s economic problems better or worse? China is holding together. Whether it will stay on course remains to be seen.
[Holding China Together is now available from Amazon. As is Dali Yang’s other new book, Remaking the Chinese Leviathan: Market Transition and the Politics of Governance in China. And, Editorials will be on vacation next week. – Ed.]
May 18, 2004
China’s Crony Crisis
By Sam Wilkin, Editor in Chief
[printer-friendly version]
The hype on the Chinese market has reached deafening levels. “If you want to be the world leader in your industry, you must be the leader in China,” said G.E.’s Jack Welch. But a rising chorus of dissenters argue the country’s economy is headed for crisis. So which is it?
A specter is haunting China – the specter of communism. Or rather, the specter of the country’s transition from communism, and the unorthodox path China took to make this transition at world-beating rates of economic growth.
First acknowledge the sheer improbability of what China accomplished. Economies without private property rights are not supposed to grow. And the Chinese economy had poorly protected property rights, excessive and arbitrary regulation, haphazard enforcement of contracts – a recipe for failure. Yet the Chinese economy expanded at nearly ten percent per year between 1980 and 2001. At the end, the average Chinese was 800 percent richer than he had been just over two decades before.
One does not violate the basic laws of economics without doing something a bit unusual. And China’s growth was surely that. As China scholar Yingyi Qian points out, between 1979 and 1993, most of the new firms created in China were not private businesses, they were state-owned enterprises run by local governments. By 1993, these local state-run firms produced 42 percent of China’s national output, against only 15 percent for the private sector.
Certainly, it is an odd “market reform” program that creates more state-owned companies. But China’s leaders knew that most private businesses could not survive the country’s predatory bureaucrats and uncertain property rights. So local governments were authorized to set up their own, public, enterprises. Any “profits” these generated could be kept as local government revenues. (A powerful incentive for tax-starved local officials eager to fund local projects, as well as their own salaries.) China’s leaders surmised, correctly, that local state-run enterprises, selling into competitive national markets, would be both efficient and – backed by local governments – able to protect their own property rights and contracts, even if the legal system was not yet up to the task.
This was a tremendous success. But the catch is that such unorthodox strategies have created a deeply politicized economy in China. Far from the ideal of an unbiased referee – embodied by America’s Federal Reserve Chairman Alan Greenspan, immune to political influence – China’s policymakers frequently step onto the economic playing field.
A recent example: as China’s growth rate has neared ten percent, the country’s leaders have tried to slow an economy they worry is out of control. But this has proved difficult. Local officials, determined to boost growth, simply ignore orders to slow things down. In the first two months of 2004, investment projects at the local level shot up by over 60 percent from the same period a year ago. As a Chinese official explained to the Financial Times – “The local governments are too powerful. If they want a loan, then local banks can’t really refuse.”
To be sure, highly interventionist governments can deliver rapid growth. Especially in export-oriented economies. Backing individual businesses does little harm when what these businesses want is to succeed in competitive foreign markets.
But the Achilles heel of such regimes is their performance in economic downturns. No business wants a recession, so interventionist policymakers try to prevent them – in the process creating imbalances that can turn a downturn into a full-blown crisis. Beholden to well-connected financial firms, the Thai government held its currency peg until the country’s foreign reserves were all but wiped out – sparking the Asian financial crisis. The Korean government allowed influential business conglomerates to continue borrowing until debt-to-equity ratios reached unsustainable levels and disaster ensued. In the wake of these debacles, the fast-growing “Asian Tigers” were redubbed “crony capitalists.”
Certainly, the extreme pessimists are wrong. China’s growth is no mirage. And, despite recent problems, slowing the overheating economy should be possible.
But when China approaches its next real downturn the true test will come. The levers of political intervention in the economy, held by local governments and others, are many and powerful. If the economy does slow, these levers will be thrown. Rather than the “hard landing” which concerns many commentators, the danger for China is a landing that is too soft. Interventionist efforts to force growth, and defy the business cycle, will produce inefficient investment, excessive lending – in sum, imbalances that could easily turn the country’s next cyclical downturn into a true economic crisis.
[printer-friendly version]
The hype on the Chinese market has reached deafening levels. “If you want to be the world leader in your industry, you must be the leader in China,” said G.E.’s Jack Welch. But a rising chorus of dissenters argue the country’s economy is headed for crisis. So which is it?
A specter is haunting China – the specter of communism. Or rather, the specter of the country’s transition from communism, and the unorthodox path China took to make this transition at world-beating rates of economic growth.
First acknowledge the sheer improbability of what China accomplished. Economies without private property rights are not supposed to grow. And the Chinese economy had poorly protected property rights, excessive and arbitrary regulation, haphazard enforcement of contracts – a recipe for failure. Yet the Chinese economy expanded at nearly ten percent per year between 1980 and 2001. At the end, the average Chinese was 800 percent richer than he had been just over two decades before.
One does not violate the basic laws of economics without doing something a bit unusual. And China’s growth was surely that. As China scholar Yingyi Qian points out, between 1979 and 1993, most of the new firms created in China were not private businesses, they were state-owned enterprises run by local governments. By 1993, these local state-run firms produced 42 percent of China’s national output, against only 15 percent for the private sector.
Certainly, it is an odd “market reform” program that creates more state-owned companies. But China’s leaders knew that most private businesses could not survive the country’s predatory bureaucrats and uncertain property rights. So local governments were authorized to set up their own, public, enterprises. Any “profits” these generated could be kept as local government revenues. (A powerful incentive for tax-starved local officials eager to fund local projects, as well as their own salaries.) China’s leaders surmised, correctly, that local state-run enterprises, selling into competitive national markets, would be both efficient and – backed by local governments – able to protect their own property rights and contracts, even if the legal system was not yet up to the task.
This was a tremendous success. But the catch is that such unorthodox strategies have created a deeply politicized economy in China. Far from the ideal of an unbiased referee – embodied by America’s Federal Reserve Chairman Alan Greenspan, immune to political influence – China’s policymakers frequently step onto the economic playing field.
A recent example: as China’s growth rate has neared ten percent, the country’s leaders have tried to slow an economy they worry is out of control. But this has proved difficult. Local officials, determined to boost growth, simply ignore orders to slow things down. In the first two months of 2004, investment projects at the local level shot up by over 60 percent from the same period a year ago. As a Chinese official explained to the Financial Times – “The local governments are too powerful. If they want a loan, then local banks can’t really refuse.”
To be sure, highly interventionist governments can deliver rapid growth. Especially in export-oriented economies. Backing individual businesses does little harm when what these businesses want is to succeed in competitive foreign markets.
But the Achilles heel of such regimes is their performance in economic downturns. No business wants a recession, so interventionist policymakers try to prevent them – in the process creating imbalances that can turn a downturn into a full-blown crisis. Beholden to well-connected financial firms, the Thai government held its currency peg until the country’s foreign reserves were all but wiped out – sparking the Asian financial crisis. The Korean government allowed influential business conglomerates to continue borrowing until debt-to-equity ratios reached unsustainable levels and disaster ensued. In the wake of these debacles, the fast-growing “Asian Tigers” were redubbed “crony capitalists.”
Certainly, the extreme pessimists are wrong. China’s growth is no mirage. And, despite recent problems, slowing the overheating economy should be possible.
But when China approaches its next real downturn the true test will come. The levers of political intervention in the economy, held by local governments and others, are many and powerful. If the economy does slow, these levers will be thrown. Rather than the “hard landing” which concerns many commentators, the danger for China is a landing that is too soft. Interventionist efforts to force growth, and defy the business cycle, will produce inefficient investment, excessive lending – in sum, imbalances that could easily turn the country’s next cyclical downturn into a true economic crisis.