This time, Beijing must take risks

28.02.12 Publication:

China is the sort of country, and economy, that can make you feel giddy. No sooner do you think you have grasped the basics of how China works and the direction it is heading in than it changes. This may be frustrating for foreign observers and competitors, but it should not be surprising. The fact that China’s economy is growing by 10% a year means that it is doubling its GDP every seven years. You can’t do that without changing pretty radically, both in social and economic terms.

So change in China is just a routine. Now, in a new report called “China 2030”, the World Bank has said that the country is at a turning point. It could, the report’s authors say, continue growing rapidly during the next two decades, albeit perhaps at a more moderate rate of 6-7% a year, and it could do so without destroying the world’s environment or its own society, but only if it changes quite substantially.

The proposals for change contained in the World Bank’s report are quite familiar and conventional, both because the topic has been thought about before by other analysts and because the report has been written in collaboration with Chinese officials. The most interesting question is not about the proposals themselves—which amount chiefly to being more innovative, green, egalitarian and privatized—but about whether change really can remain forever routine in China.

It can, in principle. One reason is that the country is so large and diverse: development can and does migrate geographically, just as Chinese workers have done. With a population of 1.3 billion, China is like four Americas all in one country. So just as the United States has, during its history, sometimes made greater advances in some regions than others, with the focus and nature of growth moving around, so can China. This gives it inbuilt flexibility.

A second reason is that ever since Deng Xiaoping took over the leadership of the country in 1978, it has been highly pragmatic. “It doesn’t matter whether a cat is black or white,” he famously said, “as long as it catches mice.” So policies and emphases have changed, whether in response to problems or to new opportunities. The Communist Party of China in reality has no ideology beyond the imperative of its own power and survival.

Piles of books and articles have been written during the past few decades predicting an imminent crash in China. Generally, their argument has either rested on an idea that the country’s economic policies were going wrong, or that it would soon face political turmoil amid a rebellion against the Communist Party. All have been wrong.

The economic predictions have generally under-rated the flexibility of China, its ability to absorb problems, shocks and waste. The political predictions have under-rated the flexibility and resilience of the Communist Party, as well as the tolerance of Chinese citizens for authoritarian government as long as their incomes and opportunities are continuing to improve.

Yet neither flexibility nor resilience can be counted on forever, either in the economy or in politics. In fact, the biggest worry is, or should be, the possibility that flexibility and resilience may come to contradict each other, in ways that the World Bank report had necessarily to be too polite to point out.

The resilience of the Communist Party and its arms of government has been built in a brilliant way: since the death of Deng in 1997, the Party has transformed itself from its old revolutionary, ideological origins under Mao to become essentially a meritocratic bureaucracy. No longer can anyone be as powerful as were Chairman Mao and then Deng himself. Now leaders are subject to strict term limits, and all posts throughout the party are rotated regularly.

One of those leadership changes is due this year, as President Hu Jintao and his premier, Wen Jiabao, retire at the 18th Party Congress in the autumn after nine years in office, to be replaced, it is thought, by Xi Jinping and Li Keqiang. This rotation of leadership, and of all party posts, serves to keep corruption under some sort of control, and to avoid destructive power struggles. So far, it has succeeded in this superbly.

What it also does, however, is to encourage timidity and gradualism. President Hu will have been in office for nearly a decade but will have no major reforms or changes associated with his name. China no longer does the “great leaps forward” promoted so devastatingly by Mao in the 1950s. Its bureaucracy is too conservative for that. No one wants to take risks, it seems.

The sort of proposals promoted by the World Bank, and much discussed by analysts and Chinese officials alike, do require risks to be taken, however. In recent weeks, there has been a sudden outburst of openness by officials linked to the Chinese central bank, arguing that the country needs to liberalise its capital markets more rapidly, even making its currency convertible. But this would be risky. It is very unlikely that the outgoing leadership would countenance such a risk, and we do not yet know whether the new leadership will be any bolder.

Pragmatism and the widely held desire to carry on growing, lifting even more Chinese out of poverty and raising China to the status of a rich country may, in the end, lead the bureaucracy to be more flexible. But this is not inevitable. Systems, even successful ones, can become blocked and ossified.

That is what happened to Japan in the 1980s, and in a different way it is what happened to Italy too. Special interests become entrenched. The establishment grows conservative. That is the real threat to China’s growth too.