Deepak Lal: Reflections on China

The essential problem facing the Communist Party is to maintain its legitimacy with the growing marketisation of the economy.

I have recently returned from a three-week lecture tour of China, where apart from Beijing and Shanghai, I also took a boat trip up the Yangtze to Chongqing, which showed how the Chinese economic miracle is now spreading inland. In this column I want to summarise various impressions which lead to reflections where China is headed.

The first and most unexpected reflection concerns its new-found interest in India. For the first time since my first visit in 1984, all three universities""Peking, Fudan and Chongqing""wanted me to talk on India's caste system and current economic prospects. Peking University Press is even bringing out a Chinese language edition of my The Hindu Equilibrium early next year. The main topic of discussion with various young private entrepreneurs I met in Shanghai was again economic development in India. The major point of interest was how a democratic, politically chaotic, socially and ethnically divided country could be matching Chinese growth performance. Often linked to this was the question of how India could have slowed its population growth rate without the draconian coercive population measures China has taken to limit its population. Finally, there was the question of the relative strengths and weaknesses of the two Asian giants, and how in particular their emerging multinational companies would fare in the future.

This new-found interest in India reflects growing awareness among China's elite that despite their spectacular economic performance to date, their economic model might have problems. One reflection of this is provided by the relative savings/investment rates and the resulting growth rates in India and China. With a savings rate twice that of India (42 per cent vs 23 per cent), China's growth rate in the period 1991-2001 was only a few percentage points higher than India's (7.5 per cent vs 6.1 per cent p.a.). This shows the relative inefficiency in the use of capital in China, both because of the failure to reform the banking sector, as well as the limited access Chinese private firms (the growth engines of the economy) have to their compatriots' savings, which, lacking any other alternatives, are still placed in the nationalised banking sector and lent on to the inefficient state-owned enterprises. (See my "A proposal to privatize Chinese enterprises and end financial repression," Cato Journal, Spring/Summer 2006).

This, in turn, as Minxin Pei shows in an important book (China's Trapped Transition) is because the Communist Party still wants to control the "commanding heights", as these provide the "rents" for it to maintain itself in power. Similarly, the government has been unwilling to privatise the telecom sector, unlike India, as its control is essential in policing the Internet (with reportedly 30,000 special Internet policemen), which could threaten domestic order. It has also sought, not too successfully, to co-opt private entrepreneurs into the party. Instead it is trying to create a set of national champions from its SOEs, to be listed on foreign stock markets. But, it is unlikely that these will be converted into world-class companies unless they are privatised (as the example of D' Long, a conglomerate spanning food and financial services, which collapsed last year with huge debts, shows). India's private companies, now going global, are a better bet.

The essential problem facing the Party is to maintain its legitimacy with the growing marketisation of the economy. The growing corruption of its cadres, highlighted by the sacking of Chen Liangyu, the Shanghai party chief, whilst we were in China, illustrates the dangers. Deng Xiaoping's strategy of using rapid economic growth as a means of legitimising the Party's rule, after the chaos and disorder of the Cultural Revolution, has been spectacularly successful. But with rising wages, the next stage of China's evolution involves moving up the ladder of its comparative advantage, out of the simple labour-intensive manufacturing, on which past growth was based, on to more capital-intensive rungs. But, without financial reforms which give private entrepreneurs access to Chinese savings, this is going to be difficult. This would involve loosening the political control, which the Party still exercises over the economy.

Another impression suggests that, with the death of Communism as an ideology legitimising its rule, the Party may be taking another tack. On my last visit to Beijing in 2004, the graduate student showing me around asked whether I had ever visited the Confucius temple. I had not even heard that there was one. It was an eye-opener. Alongside the temple there was a huge newly constructed hall which contained stone slabs from around China, with the names of the mandarins who had passed the Confucian exams, going back millennia. This time when we went to see the temple, it was in the midst of a major reconstruction ahead of the 2008 Olympics, and was set to become a major tourist attraction, whilst, for the first time since I have been to China, the ancient sage's birthday was being celebrated in his birthplace. Perhaps he is now set to provide the legitimacy for a benevolent authoritarian regime, which follows the sage's edicts: venerate order, the Emperor and ancestral familial links.

The strength of these ancient cultural traditions was borne out by a number of academics we met, who gave up good jobs in the West to return to look after their aged parents. Similarly, many of the young aspiring to seek further education in the West claimed they would return because of their familial obligations. This return to ancient cultural traditions might solve the government's current dilemma: how to cede political control over the economy whilst still maintaining itself in power. It would allow China to undertake the full move to the market and the perpetuation of its economic miracle. If on a future visit to Beijing I see Confucius, perhaps not replacing, but side by side with the portrait of Mao, which dominates Tiananmen Square, I will know that the Chinese economic miracle is set to continue, as China reverts to its traditional roots but with a modernised market economy!