The rise of China, Part III: insurgent capitalists?

In part I and part II, I discussed the general geo-political implications of the rise of China, and the internal dynamics within the Chinese bureaucracy and the Party, concluding that one should not underestimate the disruption to the whole of China and its international relations that come from internal power struggles. I ended with the observation that the longer-term stability of China needed an internal force strongly pushing the Party towards internal democratisation. In this final essay on the rise of China I will talk about the potential role of the capitalists.

The main thing to know about entrepreneurs and capitalists in general in China is that they are completely under the control of the Party. Every major business with more than 80 workers, and even many smaller businesses, now has official Party cells that monitor its decisions. Hence a whopping 13% of all enterprises have Party cells, which cover around 60% of the total workforce. Only small family businesses (of which there are many) are outside of Party control.

Also, nearly all wealthy citizens are members of the Party. Nearly all interactions with the judicial system, local regulators, the banks, and the tax system go through the networks of the Party. Essentially, the capitalists cannot breathe inside a Chinese boardroom without the Party noticing it. The control of the Party within China is thus total and the liberties that capitalists take for granted in the West are unknown. There simply is no big business outside of the Party.

One might thus think that there are no capitalists in China from a political perspective and that it would be naive to think capitalists in China will play the same reforming role as they did in the West.

Yet, this is not true. The total nominal control over capitalists inside China hides an increasing inability of the Party to truly control the capitalists.

In what way are Chinese capitalists independent from the Party? Foremost, they are independent when they travel abroad. Chinese entrepreneurs have joined the international jet-set and regularly travel to the West, Africa, Latin America, etc. And there are no Party cells there to observe what they say or think. Many of their children, particularly those of the wealthiest capitalists, study in the West (though the Party does try to keep them in line when abroad!).

And these traveling Chinese dream. They encounter a world in which capitalists have far more power than they have themselves in China. They encounter a world in which they effectively run many places instead of being tolerated and having to expend great energies on internal politics within China.

Hence, the Chinese capitalists are, as we speak, adopting the ideals of the West. Many of their children stay in the West and start internet forums on the desired direction of Chinese reforms. A good example of a site that does this, albeit very subtly, is the ministry of Tofu, whose mission statement speaks of social justice and of which the founder says of himself “Chia-fu grew up in an authoritarian regime until he went studying abroad five years ago. “. Idealistic youngsters like him influence their visiting family members. Many join organised religions. They whisper of how life could be free from Party control when they come to visit their relatives and friends in China.

Certainly, this influence is not nearly as strong as the official propaganda in the Chinese media and schools. But it is outside of Party control and will remain outside of its control. Unlike in previous centuries, the bureaucracy cannot effectively control the ideals of its population simply because of the lifestyles of its capitalists -travelling, studying, and emigrating abroad. The only way to control this is to severely restrict business contacts, which is of course like killing the chicken that lays the golden eggs. No individual faction within the Party is going to enforce this willingly on its own turf.

Also, the capitalists will in decades to come find that the Party is less useful to them, and more of a direct cost, something that is currently not true. The political influence that the Party cells currently have, make for better regulations: smoothing bank transactions, and leading to better laws than without them. An efficient local Party is much like having good government anywhere else, and regions with well-operating Party control are growing at incredible rates.

Yet, as all the easy pickings are exhausted; the majority of the rural population becomes urbanised; the economy becomes more service oriented; and a whole generation has had at least secondary school and found jobs; the nature of the Party’s involvement with the economy will change just as the nature of the Imperial bureaucracy changed in various episodes in the last 2000 years when it ran out of easy-growth options. The Party will then become more oriented towards local extraction instead of local growth – just as Imperial bureaucrats turned from reformers to feudal lords when growth ran out in the 19th century. They will do this because they can and because it is then the quickest route to personal wealth. And there is nothing the central elements of the Party can do to stop it without internal reform.

This dynamic means that in about 30 years or so, which is some 10 years after the growth spurt most likely ends, the capitalists and thus the wealthy business part of China will see the Party as merely being a corrupt grabber of wealth rather than a creator of wealth. As Hayek and the other Austrians argued strongly, authoritarian control of a vibrant innovating modern economy is too hard and something has to give, either the authoritarian bit or the vibrant bit. This insight will then become the overwhelming opinion of much of the Chinese population, even the Party members themselves (particularly since the Chinese have adopted mainstream economics for their own universities that tells them all this!). The Party will basically lose legitimacy in the sense of no longer being thought of as being there for the greater good.

And that is when there will be true internal pressure to reform. The wish of the Chinese to be wealthy and part of a winning, growing economy, will visibly clash with the wish for un-checked control of the Party.

Such a clash has happened in the past also and is already being debated now, but the ability of the Imperial bureaucracy to simply disengage China from the rest of world whilst it feasted on the internal riches was much easier in centuries gone past. If it would do this again, the wealthy would leave in droves and businesses would fold in massive numbers.

Hence it is at the point that the tradeoff has become completely visible and paramount, that I expect local Party factions to themselves start experimenting with real democratic procedures within the Party. And it is then that this would also get central Party support: the party would basically subdivide into separate groups and would actively start to give up control, creating an outside civic society.

The key policy I will look out for to tell me whether or not the transition to democracy has started is mobility between regions. At the moment, and historically, mobility between regions is very tightly regulated (the hukou system), with movement between regions treated on a par with movements between countries: access to services and ones’ legal status depend on whether you are allowed to be somewhere. These tight mobility controls allow local party factions to run their own empires and really underpins the control system.

Yet, business involves constantly changing business partners and changing comparative advantage, items for which regular and decentralised population movement is needed to adapt to. Continuously within and between Western countries, there is a two-way flow of expertise and companies that helps economic coordination. Business is hence naturally in favour of freer mobility.

Mobility would also be the key element in political innovation (an insight known as the Tiebout Theorem in economics): as soon as people can vote with their feet, you get a race between regions. Mobility gives regional empires a huge incentive to poach business and population from other areas with better regulation and services. That competition would also stimulate and spread innovation in the political sphere, including more democracy. Furthermore, mobility leads to a natural progression in terms of which layer of government delivers what, which itself helps an increasing separation of powers.

To be fair to the central government, it is trying to reform the legal status of migrants within China, but truly free mobility has a long way to go there. Yet, I think mobility reform is the key reform to look out for when it comes to the internal political future of China.

Even at best though, democratization will take many decades in China. Given the complete dominance of the bureaucracy in every sphere of life, it will surely take at least a generation for the Chinese to build a civic society and get acquainted with institutions that mean something outside of the bureaucracy.

What does all this then mean for China’s foreign relations? Well, things only get interesting at the end of the growth spurt, so I expect the next 20 years to be easy and relatively peaceful. The internal factions within the Party will be too busy helping their local economies grow to be in favour of truly distortionary foreign politics. If anything, they will further increase their control over business and all other activities inside China.

It is the 20 years after the end of the growth spurt that I think will be the dicey period. The internal pressures to reform will build up in a time of a stagnating economy and pretty brutal factional politics. Different factions will experiment with different things and the center won’t know quite what to do. The world needs to be a little lucky in this period and hope that the central Party members in charge then are smart unambitious politicians able to keep the worst political entrepreneurs in line. While I find it hard to predict how long the reform period will last, I do know this: we Westerners won’t have any influence on who is in charge then; but our stance towards foreign adventures will matter for the internal Chinese incentives. It would probably be a good thing for the West to have a couple of sultry dogs carefully consider the best way to contain China without shaming it in that period. It won’t be easy to contain the most powerful country in the world.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

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