The relentless revolution: a history of capitalism (60 page)

While often divided on how to proceed forward, the Communist leadership has agreed that it is essential to maintain the party’s control over the daily lives of the people. Yet moving toward a market economy, even a “socialist market economy,” meant encouraging men and women to act on their own. Private initiative and state control exist in an awkward tandem. Reform leaders subscribed to the bird cage economy doctrine, in which the central plan is the cage, and the bird the economy. The moral: Without the cage, the bird will fly away, but the bird has to have the feeling of space, so the cage must be swung to create the illusion of greater space to keep the bird happy.
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But Westerners might say that the party now has the tiger by the tail. It can’t slow down or reverse course because the gains have been too conspicuous and widely shared. A phrase in a
Los Angeles Times
article caught something of the world-turned-upside-down aspect of Chinese development: “former Red Guards-turned-millionaires.”
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The June Fourth Incident was a wake-up call for the party. It would take strong material progress to hold the demands for more freedom at bay. In 1992 Deng Xiaoping went on a speaking tour in the south of China. Invariably referred to as his “famous trip,” it prepared the country for a round of new reforms that would be instituted in subsequent congresses of the China Communist Party. The law and the party looked more favorably upon private property. A 1999 constitutional amendment gave private ownership the same status as state ownership. Trading in company stock was regularized; employers were allowed to fire unneeded workers. This latter advance recalls the clothiers in sixteenth-century England who convinced the Privy Council that it was wiser to let them save their capital for the return of demand than to spend it keeping weavers employed. Capitalists were allowed to become members of the Communist Party. Party membership grew by 10 percent in the five years before 2007, when it hit seventy-four million.

Importing technology and enhancing technological education continue apace, though China’s investment in education is half that of Brazil and considerably less than that of India. China sends its brightest young people to foreign universities to learn the best engineering and science firsthand. This has been a policy sword with a double edge. Of the some thirty-five thousand students sent abroad in the late 1990s, only nine thousand came back to China.
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But the return rate is improving, and in 2006 the United States sent more than 11,000 students to China. It’s hard to understand why the Chinese government doesn’t spend some of its vast savings developing a system of education commensurable with the third-largest economy in the world.

After fifteen years of letting up on party control in the economy, the Communist Party began in 1994 to rebuild itself by giving party members incentives to participate in economic development. So far the result has been more concentrated power but with a new efficiency in the state-controlled enterprises in energy, steel, transport, communications, electricity, and health. A new coalition of elites is in charge, rewarding itself for successful initiatives all the way down to the local level. Despite the increasing gap between rich and poor, the party has spent a great deal on social services with special attention to the backward areas in western and central China.

China’s Mixture of Investment Capital

China’s banking system is a mixture of four giant state-owned banks, derivative of the socialist economy; joint-stock commercial banks founded for development purposes in 1994; and city banks. The government owns a majority interest in almost all state banks. Direct foreign investment is large and comprised mainly of long-term commitments. Termed “patient capital,” these commitments allowed China to survive the Asian financial crisis of 1997–1998 much better than most countries in the region. The Chinese are great savers, so interest rates have continued to be low. Private and public savings in China have formed America’s great piggy bank in its twenty-first century spending spree. Corporations in China still have far to go in creating sound organizations. State banks are plagued with insider favoritism. The security of Chinese investments is going to depend upon putting in place financial accountability, better laws, and transparency. As a step in that direction Chinese bank regulators in 2008, partly in response to the worldwide recession, increased the number of qualifying examinations candidates for positions in finance must take as well as widened the range of employees who must take them.
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New laws permit foreigners to invest directly instead of through joint ventures. Unlike most developing nations, China enjoyed the patronage of lots of rich Chinese living outside the country. They were either expats, many of whom had fled to Hong Kong in the 1950s and 1960s, or descendants of emigrants from earlier Chinese diasporas. Now that China has embraced the market, these ethnic Chinese have been eager to invest in the country and found ways to do so formally as well as informally through money clubs and shops. And they have very deep pockets. In the Philippines ethnic Chinese represent 1 percent of the population and own close to 60 percent of the wealth. In Indonesia their wealth is greater with 1 percent of the population controlling some 70 percent of the country’s private economy, including its largest conglomerates. The Burmese economy is even more dominated by ethnic Chinese.
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Backed by this wealth, foreign capital and foreign companies flooded into China. A new profit tax replaced the system of profit retention.

China has found its best customers in Japan and the United States, but it is now embarking on a program to make its Tibetan cities nexuses of commerce with India. China’s premier Wen Jiabao visited India in 2005. His trip served as a catalyst in the process of building overland trade routes between the People’s Republic of China and India through Tibet. As with so many developments in China, this one is directed not so much to get the biggest bang from the yuan as to serve social and political needs. The Red Army of the People’s Republic of China invaded Tibet in 1951. Eight years later the Dalai Lama fled Tibet and began a global campaign to achieve more autonomy for his former country. China has encouraged its people to move to the region and would like now to accelerate the integration of Tibet into the nation proper, a move vigorously contested by native Tibetans.

Pouring resources into its poor western region serves other social and economic goals. The completion of a new railway from the Tibetan border makes it much easier to access Calcutta, which is 750 miles from the southwestern border of China. At the same time, China has built a blue water navy to patrol the Arabian Sea and Indian Ocean sea-lanes used to carry its oil. Border disputes have kept India and the PRC at arm’s length for half a century, but with both countries ready to exploit new economic opportunities, they may well want to bury the hatchet. The threat of declining sales in Europe and the United States makes this policy more attractive. Trader fervor has even extended to the violence-pocked frontier of Kashmir with trucks of apples and walnuts going from India and returning with rice and raisins.
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China’s exports exploded in the last decade of the twentieth century, those going to the United States alone doubling from $100 billion to $197 billion in the first four years of the twenty-first century. The wrenching contraction of demand for China’s exports during the economic downturn, off by 18 percent in the closing months of 2008, is testing the flexibility of its economic policy makers. At the same time, the sophistication of its exports increased with computer peripherals and consumer electronics joining footwear and toys. Exports include auto parts, as befits China’s robust automobile manufacturing sector.
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In 2004 China passed the United States as the world’s leading exporter of information and communications technology, a strong sign of its success in preparing a skilled labor force. Domestic spending absorbs little more than one-third of China’s annual production, compared with two-thirds in the United States.

Like its people, the government is cautious with its great wealth, stashing most of it away in U.S. Treasury notes. This is a boon for the American economy, but not necessarily good for the Chinese one. It leaves a great scope for continued economic growth in China if the party can find the means to turn its many savers into spenders. The economic downturn of 2008 makes such a campaign more imperative, but it won’t be simple. The Chinese save because they don’t have Social Security, so the government would have to expand pension programs. Manufacturing priorities would have to change. Chinese consumers would want a different range of items from the mini hi-fi systems and high-priced footwear Westerners cherish. Still, the effort is being made. The government is encouraging its banks to lend more and to lower down payments for house mortgages from the current 20 to 30 percent. Turning the Chinese into mall rats would have an impact on the entire global economy, for presumably there would follow more imports from abroad.

Economic development in China is coming along nicely, but social changes are proceeding more slowly. Chinese men and women must cross the Rubicon of privatization with the party sitting on their shoulders. Or to use a Chinese expression, they are crossing “the river by groping the stones.” Because the Communist Party maintains comprehensive control, it influences a range of what would be private, individual decisions elsewhere. A residents’ committee is responsible for everything that happens outside people’s work units, which have their own party committees monitoring behavior. The residents’ committee looks after housing but also arranges weekly political studies, operates day care centers, and distributes ration coupons.
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On top of this structure rides the party discipline committee, founded in the early 1980s to prevent and punish party members’ abuses of power. It is staffed by retired party members, as are various street patrols. This control mixes poorly with the free and easy communication introduced by information technology. The American search engines Google and Yahoo have repeatedly had to struggle against bouts of censorship imposed by the Chinese government, no friend to free speech.

The interconnectedness of the global economy and the world press that covers it guarantees that no bad deed will go unpublished, if not unpunished. Press coverage like that of the tainted milk scandal of 2008 could have been suppressed when Chinese leaders ran an autarkic economy. Those leaders who succeeded Deng have been willing to accept this tradeoff, recognizing that there is no development without closer and closer linkage to the world even though the global connectedness means that it cannot squash studies like the one the World Bank did in 1997, when it estimated that air pollution costs China 8 percent of its GDP.
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The world’s news media exhaustively covered the earthquake in May 2008 in Sichuan Province, where eighty-eight thousand died or were missing, and five million were made homeless. This natural disaster quickly became a political one when it became apparent that shoddily built schools accounted for an exaggerated death rate among children.

These contacts will change China’s people and their relation to the world, even if we can’t predict exactly how. Foreign reporters now publish stories on the extent of corruption in China. Estimated to absorb between 3 and 15 percent of China’s seven-trillion-dollar economy, corruption takes many forms from inside trading and crony deals among local officials to shakedowns and counterfeit money in paychecks. The government punished more than five thousand local officials for corrupt practices in 2008, but party members form the backbone of its governance. Bribery to ensure a successful operation, entrance into a school, or to get a driver’s license is common. With more money sloshing through the society, opportunities for graft have escalated. Victims can and do post protests on the Internet, but they risk violent retribution.
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As the 2008 Summer Olympics in Beijing demonstrated, China is not only ready to be a world player but willing to spend billions to put on a global show of its talent, discipline, and creativity.
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Just how far China has come can be measured in little as well as big ways. In 1987, one flight arrived in Beijing every twenty-four hours from Tokyo’s Narita Airport, one daily flight between a city with some ten million people and another with twenty-nine million! Think how many flights crisscross the space between Los Angeles and San Francisco or New York City and Philadelphia or Boston. But that was then. Now there are many airlines and dozens of flights. Shanghai, for instance, has a 240 mph train taking passengers to its airport. From Hong Kong ships carrying those boxes that revolutionized cargo shipping leave at the rate of one per second, year round, the equivalent of forty million standard containers. Confronted with worldwide recession in 2009, China slowed down, but the pace before had been hectic.

Shock without Therapy in Eastern Europe

China’s reforms, though profound, were gradual, unlike those in Eastern Europe, where as one commentator said of Poland, we underwent “shock without therapy.”
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Simultaneously Russians embarked on perestroika, economic restructuring, and glasnost, creating transparency in the exercise of political power, in the 1980s. The peaceful collapse of the Soviet Union in 1991 came in the midst of this double effort to convert a party-dominated political order into a democracy and a command economy into a market-oriented one. In the early 1990s, exuding a bit of the triumphalism occasioned by “the fall of the Wall,” Western experts advised the former Communist nations to enter the market with a big bang. Speaking through the World Bank and the International Monetary Fund, these advisers recommended an immediate freeing of prices from all controls and a selling off of state-owned properties to private parties. They expected that the economies would tank for a short while, then quickly recover. Instead production took a long slide, and prices rose to inflationary rates.