Pros­per­ity has not blessed China’s ‘bot­tom bil­lion’

The Washington Times Weekly - - Commentary -

Mark­ing the 90th an­niver­sary of the Chinese Com­mu­nist Party on June 30, Pres­i­dent Hu Jin­tao told col­leagues the party’s sur­vival de­pends on the twin pil­lars of eco­nomic growth and so­cial sta­bil­ity. The dilemma for the coun­try’s lead­ers is that the way China achieves rapid eco­nomic growth is in­creas­ingly the rea­son be­hind grow­ing in­sta­bil­ity in Chinese so­ci­ety. In fact, loos­en­ing rather than tight­en­ing its grip on power is more likely to en­sure that there is har­mony rather than tur­moil through­out China.

The key to un­der­stand­ing and re­solv­ing the dilemma lies in the na­ture of the Chinese po­lit­i­cal econ­omy. The com­mon wis­dom is that China’s lead­ers are do­ing a magnificent job build­ing pros­per­ity for the nation’s cit­i­zens. Af­ter all, since Deng Xiaop­ing’s re­forms in 1979, Chinese gross do­mes­tic prod­uct (GDP) has grown more than six­teen­fold. But it is how China achieves growth and who ben­e­fits from the growth that re­ally mat­ters. China has pur­sued a model of in­vest­ment-led state cor­po­ratism since the mid 1990s. This was cob­bled to- gether af­ter the 1989 Tianan­men Square protests to pre­serve the eco­nomic power and rel­e­vance of the party. But it is the coun­try’s state-led eco­nomic growth model that puts so­cial sta­bil­ity at risk.

Many out­siders are un­aware that the great­est con­trib­u­tor to Chinese growth since the 1990s has not been net ex­ports but do­mes­ti­cally funded fixed in­vest­ment used to buy ma­chin­ery or con­struct build­ings and in­fra­struc­ture such as roads and bridges. For ex­am­ple, this pro­pelled 40 per­cent of GDP growth in 2008, 90 per­cent in 2009 and around 55 per­cent in 2010.

The re­liance on fixed in­vest­ment is the high­est of any econ­omy over the past cen­tury. But it is not just the em­pha­sis on fixed in­vest­ment that is strik­ing. Where the cap­i­tal goes is also all-im­por­tant. Al­though state-con­trolled en­ter­prises pro­duce one-quar­ter to onethird of the coun­try’s out­put, they re­ceive more than three­quar­ters of its cap­i­tal, and the fig­ure is ris­ing. Re­veal­ingly, state-con­trolled en­ter­prises re­ceived more than 95 per­cent of the 2009-10 stim­u­lus money. The Chinese state sec­tor owns at least two-thirds of all fixed as­sets in the coun­try. In con­trast to the 130,000 state-owned en­ter­prises, the tens of mil­lions of pri­vate-sec­tor firms and busi­nesses are left to fight for the scraps.

Tellingly, China’s 50-mil­lionto 200-mil­lion-per­son mid­dle class (de­pend­ing on how we de­fine the term) is the strong­est sup­porter of the party, which is about 80 mil­lion strong. These elites com­prise the fastest­grow­ing groups want­ing to be­come party mem­bers, al­most a quar­ter of whom are pro­fes­sion­als and skilled work­ers, a third stu­dents, and an­other third suc­cess­ful busi­ness­peo­ple. Join­ing the party has be­come a lu­cra­tive ca­reer move. By con­trol­ling the most im­por­tant in­dus­tries and the bulk of the coun­try’s cap­i­tal through state-owned banks as well as by over­see­ing an ex­ten­sive sys­tem of awards, pro­mo­tions and reg­u­la­tions, the Com­mu­nist Party con­tin­ues to con­trol and dis­pense a dom­i­nant share of the coun­try’s most val­ued eco­nomic, pro­fes­sional and so­cial op­por­tu­ni­ties.

Mean­while, about 1 bil­lion peo­ple are miss­ing out on the fruits of pros­per­ity. The coun­try’s “bot­tom bil­lion” are out­siders to China’s state-led model of de­vel­op­ment. They have lit­tle prospect of ris­ing up and suf­fer un­der the yoke of fre­quently cor­rupt and in­com­pe­tent rule by China’s 45 mil­lion lo­cal of­fi­cials.

For ex­am­ple, ac­cord­ing to a 2005 Chinese Academy of So­cial Sci­ences re­port, more than 40 mil­lion house­holds have had their lands il­le­gally seized by cor­rupt and un­ac­count­able lo­cal of­fi­cials in a priv­i­leged po­si­tion to make good from the coun­try’s boom­ing prop­erty mar­ket over the past decade. The net house­hold in­comes of more than 400 mil­lion peo­ple have stag­nated or de­clined over the past decade, while the wealth of the state sec­tor grows at 20 per­cent each year. In one gen­er­a­tion, China has gone from be­ing the most equal to the most un­equal coun­try in all Asia. It is no won­der that, ac­cord­ing to of­fi­cial fig­ures, there were more than 130,000 in­stances of “mass un­rest” in 2009, ris­ing from around 60,000 in 2006 and just a few thou­sand in the late 1990s. China spends more than $100 bil­lion on the Peo­ple’s Armed Po­lice (PAP), which is more than its of­fi­cial bud­get on na­tional de­fense and the Peo­ple’s Lib­er­a­tion Army. Sep­a­rate from the nor­mal po- lice forces, the PAP is an 800,000-strong mil­i­tary-trained unit specif­i­cally cre­ated and de­ployed to quell in­ter­nal un­rest. That means that the goal of pro­duc­ing a “har­mo­nious so­ci­ety” is be­com­ing more rather than less dif­fi­cult. Party lead­ers con­front the para­dox­i­cal re­al­ity that as GDP grows, dis­con­tent­ment and in­stances of so­cial un­rest rise even more quickly.

The ob­vi­ous way out of the dilemma is for the party to take its hands off the levers of eco­nomic power in the coun­try. If it did so and al­lowed more re­sources to flow to the tens of mil­lions of pri­vate busi­nesses in the coun­try, GDP growth would be more likely to ben­e­fit the ma­jor­ity rather than an elite mi­nor­ity.

This would mean the party los­ing its priv­i­leged and dom­i­nant role in Chinese econ­omy and so­ci­ety, but it would help build a more har­mo­nious so­ci­ety and with it im­prove the chances of the party re­main­ing in power when it cel­e­brates its 100th birth­day in 10 years.

John Lee is a re­search fel­low at the Cen­ter for In­de­pen­dent Stud­ies and the Hud­son In­sti­tute. He is au­thor of “Will China Fail?” (CIS, 2007).

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