Is It Time to Be Skeptical on China?

November 6, 2013 Editor 0

As someone who lived in China during the “Tiananmen massacre,” I’ve long been skeptical of the Communist Party’s long-term ability to lead the country forward.

An authoritarian state whose inability to compromise or recalibrate led to the bloody 1989 crackdown on peaceful protesters surely can’t hold on to power while also allowing capitalism to flourish.

But here we are on the eve of the 25^th anniversary of the massacre. The Party is still in charge; the economy is still, by and large, going strong.

And yet … a new skepticism is in the air, and this time it’s not coming from the “class of ’89.” The question that Chinese and outside economists now are debating is whether China’s leadership has the guts to allow the kinds of reforms that are needed to sustain growth and foster innovation. Economic growth was 7.7% in the first quarter – an impressive rate compared with most other countries, but one that’s considerably down from recent levels. (From 1979 to 2010, the economy grew an average of 9.9%, reaching 15% in 1984.)

A simple version of the new skepticism is this: China’s development to date depended in large part on “late mover” advantages that are no longer available. Its rapid growth resulted in part from (1) cheap land and cheap loans that were parceled out to favored enterprises; (2) an inexpensive labor force; and (3) the low economic starting point that resulted from the Communist Party’s destruction of private enterprise during its first 40 years in power.

These advantages aren’t sustainable forever. The land has been doled out. Cheap credit has mushroomed into a worrisome debt overhang. Labor is now cheaper elsewhere. And the economy’s low bar isn’t so low any longer.

The only road forward, many argue, is to loosen the state’s persistent control over nearly every aspect of society. This need not involve a democratic transformation, but it would require that China’s leaders find ways to make officials at all levels accountable to the people. The rise of social media could help nudge China in that direction, but it is not clear its leaders will have the courage to loosen their grip on the levers of information.

Innovation surely depends on such change. As Google executive chairman Eric Schmidt told a reporter in Hong Kong yesterday: If China wants to avoid the middle-income trap, it needs to develop “openness [and] free speech” because progress requires “debates about everything.”

On Saturday November 9th, the Party’s Central Committee will gather in Beijing for its latest decision-making plenum. Communist Party Secretary Xi Jinping, who took power a year ago, could use the occasion to introduce significant policy adjustments. An obvious one would be to reduce the role of state-owned enterprises, which dominate critical sectors of the economy and take a disproportionate share of capital investment. But 30 years of uneven economic reforms have created a new elite, including many Party members, who would fight any reforms that threaten their economic interests.

Add that to the inherent difficulties of sustaining the first wave of growth and the country’s looming demographic and environmental challenges, and this would seem to be a great time to be a skeptic about the Party’s ability to manage.

And yet…

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Categories: HBR, Insights

Tags: asia, china, Crown Prince Party, Xi Jinping