The compelling dramaS of former Chongqing Chinese Communist Party (CCP) boss Bo Xilai’s (薄熙來) ouster amid allegations of corruption and murder and of blind Chinese human rights advocate Chen Guangcheng’s (陳光誠) dash to safety in the US embassy in Beijing are more than just fascinating narratives of venality and courage. Unless China can purge the thousands of corrupt CCP leaders like Bo, and empower people — like those Chen represents — who have been left behind or harmed by its rapid growth, its economy will increasingly suffer.
Like the Asian Tiger economies before it, China has excelled in the first phase of capitalist economic growth, benefiting from massive infusions of capital, low-cost labor, intellectual-property theft and centralized planning. However, like many of them, China is now facing a “middle-income trap”: As wages rise, its low-end manufacturing is losing its global competitiveness, while government policies, endemic corruption and dominant state-owned enterprises are stifling the type of private-sector innovation that China needs most to generate products and services with higher added value.
China’s leaders understand this, which is why the government’s 12th Five-Year Plan calls for a gradual opening up of the Chinese economy.
A Chinese government think tank which worked with the World Bank to produce the China 2030 report outlines the structural reforms needed to strengthen the foundations of the country’s market-based economy and create a climate of open innovation.
However, if China’s national imperative today is reform, the greatest threat to that goal is the massive influence and institutionalized corruption of the country’s entrenched elites. For years, senior officials and their families have received a cut of countless major investments throughout China. They and their families have become multimillionaires by exploiting the close association of business and politics, as well their strong links with the country’s state-owned enterprises.
The resulting rise in inequality has been exacerbated by China’s capital controls and mandated low interest rates on savings. For lack of other options, poor people put their money in banks, which then lend to more privileged people to fund state-owned enterprises or much higher-yielding real-estate investments.
This system worked to drive overall economic growth and provided financial rewards in the first phase of China’s post-reform growth, but the incomes of ordinary Chinese have stagnated over the past decade. Their interests have been neglected, capital has been misallocated and major negative environmental and social side effects have emerged. Now those who have benefited most from the current system are blocking badly needed reforms.
For example, years of imbalanced incentives have led China to overbuild premium residential real estate which should cause prices to fall dramatically. However, although the government is trying to suck some of the air out of the market, the authorities cannot easily take the more aggressive action that is required because Chinese officials and other elites store so much of their wealth in real estate which also comprises much of the collateral of state-connected banks. Similarly, although state-owned enterprises are pulling too much oxygen out of China’s economy, reforming them would require taking on the country’s most powerful business and government leaders.