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Dilemmas of Reform in Jiang Zemin’s China, by Andrew J. Nathan, Zhaohui Hong, and Steven R. Smith (eds.)
1. Introduction: Dilemmas of Development
The current moment presents choices for China as dramatic as any that important country has ever faced. As the nation enters a new stage of economic reform more challenging and risky than those that have gone before, the pressure for political change also grows. As Guoguang Wu argues in Chapter 2, until now the ruling Chinese Communist Party has been able to legitimize its rule on the basis of economic performance. But the new phase of economic reform bears a price that must be paid by ordinary people, and thus challenges the legitimacy of Communist Party rule in a new way. Wu’s insight sets the theme for all the essays in this volume, which explore from varying perspectives the dilemmas of China’s new phase of reform.
No Chinese citizen, at home or abroad, supportive or critical of the regime, takes these dilemmas lightly. While economic reform is imperative and political strains inevitable, no one wishes to see the nation suffer political disorder. Many hope for a transition to democratic institutions; all wish that any transition occur without violence or instability. What choices the government faces—how it should handle the next phase of transition and the key economic policy choices within it—are the questions addressed by the essays in this volume.
This book is distinctive because the contributors are at once Western-based social scientists, with all the objectivity and technical expertise that implies, and in most cases Chinese citizens, with the engagement, insight, and personal involvement such a status brings. The essays have been selected from among those presented at the International Conference on the Fifteenth Communist Party Congress and China’s Development, held from November 7 to 9, 1997, in Flushing, New York, under the auspices of the Center for Modern China, the World Journal, the China Development Foundation, the “Chinese American Voice” radio station in New York, and the Foundation for China in the 21st Century.
The Center for Modern China, headed by Yizi Chen, sponsors research that brings to bear the expertise of Chinese citizens holding academic appointments in the United States on policy choices facing China. Mr. Chen was director of the Economic System Reform Institute of China in the years leading up to 1989. After the Tiananmen incident of June 4, 1989, he founded the Center for Modern China in Princeton, New Jersey. Despite the intense political disputes over China’s future conducted since then within and outside China, Mr. Chen has succeeded in engaging a wide-ranging group of Chinese intellectuals abroad to cooperate with him in conducting research on policy issues facing China. Besides organizing conferences and conducting research projects, the center launched the publication of a widely respected academic and policy-oriented journal, the Journal of Contemporary China, which is now independent, and still sponsors a Chinese-language journal, Dangdai Zhongguo yanjiu (Modern China Studies). The center’s funding comes from the National Endowment for Democracy and other foundations.
The conference at which the papers were first presented was convened to discuss the significance of the Fifteenth Congress of the Chinese Communist Party (CCP), held in September 1997, for China’s economic, political, social, and economic development. Since this was the first CCP congress after the death of Deng Xiaoping, China’s paramount leader for the past twenty years, observers watched it closely for signs of new leadership alignments and for evidence of proposed solutions to China’s problems. The congress marked the consolidation of power by Deng’s chosen successor, Jiang Zemin, who serves not only as party general secretary but as national president (head of state) and chairman of the Central Military Commission. In his report to the congress, Jiang elevated “Deng Xiaoping Theory” to the status of the party’s guiding ideology for the reform period, called for bold steps in the reform of troubled state-owned enterprises (SOEs), and made ambiguous promises about political reform and legal construction. All these developments are analyzed and interpreted in the chapters that follow.
The other leaders around Jiang fit the profile of technocrats. The long-time premier, Li Peng, a conservative, was nearing the end of his term in office at the time of the congress and was soon to be shifted to the less powerful post of chairman of the Standing Committee of the National People’s Congress. Jiang’s colleague and rival, Zhu Rongji, continued to rise in stature. This forceful economic reformer from Shanghai succeeded Li as premier in March 1998. Several chapters in this volume discuss the backgrounds of these and other leaders and the significance of their shifts in power.
The rest of the world has almost as large a stake in the future of China’s reforms as do the Chinese themselves. Economic policy, political institutions, and foreign policy have been linked at every stage of contemporary Chinese history. In 1949, when Mao Zedong set China on a course of economic development through Stalinist-style socialism, it was in an international context of antagonistic relations with the West, while in domestic politics his decision brought in train the construction of a Soviet-style system of party control and state economic planning. Less than a decade later, in 1957, Mao’s Great Leap Forward propelled the nation into a new phase of self-reliant, mobilizational autarky. This economic strategy was associated in domestic politics with a system of campaign-based mass mobilization, and in foreign policy with a two-pronged confrontation against both the West and the Soviet Union. In both of these periods, China sacrificed the potential fruits of international economic cooperation for economic and political autonomy and self-reliance.
Deng Xiaoping’s domestic economic reforms, his program of limited political liberalization, and his open-door foreign economic policies, all of which began in late 1978, were likewise intimately linked, not merely coincidentally compatible. Deng’s strategy was not (and could not have been) to marketize and liberalize the economy while keeping it cut off from the world economy, but to use foreign markets, capital, technology, and management techniques to invigorate the domestic economy, and correspondingly to restructure the domestic economy to make use of its comparative advantage in the world trading system. One can even argue that the open-door foreign policy preceded the domestic economic reform policy, both chronologically and logically. Relaxation of tensions with the West (in effect, starting with Richard Nixon’s epochal 1972 visit to China) was a necessary precondition for Deng’s reforms from 1978 on, because the reforms involved an easing of domestic discipline and a reshaping of domestic ideology, both premised on a less hostile view of the West. Moreover, the reforms would have been unthinkable without an assurance of access to the technology, capital, and markets of the market economies.
The political requirement for making this new economic orientation and foreign policy work was domestic liberalization in its various dimensions—freeing the peasants to move about the country in search of work, the intellectuals to have slightly greater freedoms, the consumer to purchase, the factory manager to invest, and the technical specialist to make decisions on the basis of expertise rather than politics. These changes, however, fell short of democratization. The sustainability of such a self-limitation is one of the leading issues addressed by contributors to this volume.
Given such intimate links among economic policy, domestic politics, and foreign policy, it is not surprising that decisions on economic change have always raised deep political issues for China. In the early years of Deng’s open door, policymakers worried about four problems and often, because of them, resisted the expansion of Deng’s policies. 1
The first was dependency, the worry that China was allowing itself to be used as a source for raw materials and labor power, but not being given access to first-rate technology and losing the ability to protect its markets and its producers. Policymakers reflected this concern in the Joint Venture Law of 1979, which demanded majority Chinese control and top-flight technology transfer; in the policy of Special Economic Zones, which for a time tried to sequester international economic actors in special zones of China; in continued forms of direct and indirect protectionism; and in restricted lists of sectors in which foreign direct investment was permitted. Yet over time most of these fire walls against economic integration fell, and the rest are under attack at home and abroad.
A second concern of policymakers has been overcompromises to Chinese sovereignty, as foreigners gained the rights to own (strictly speaking, enter into long-term leases for) Chinese land, hire and fire Chinese workers, and control majority or 100 percent interests in enterprises on Chinese soil. Although there was no revival of the old and much-reviled practice of extraterritoriality (the application of foreign law to foreigners on Chinese soil), China now found that every arrest, trial, and imprisonment of a foreign national brought attention and criticism and often the need to deal more lightly with the foreigner than with a native offender. China found itself revising its laws and even its constitution to meet foreign concerns over copyright protection, nonnationalization of private enterprises, health and safety standards, and so on.
Third, Chinese leaders worried about economic distortion to their own priorities in national construction. Critics argued that the open-door policy pushed development in unwanted directions and produced undesired side effects. Some viewed the preferential promotion of foreign direct investment in the coastal regions as harming the interests of the interior as well as the nation’s macro-interest in regionally balanced development. Some feared that long-term oil and coal development projects that committed future production for foreign sale threatened the stability of domestic supply. Some deplored the allocation of hard-earned capital to the hotels, transport facilities, and site development needed for tourism. Many worried that the open door encouraged an emphasis on capital-intensive industry that was expensive and did not help to alleviate China’s labor surplus.
Finally, many Chinese leaders worried about the social distortion introduced by Deng’s economic policies. In some ways this has been the most enduring concern. Rightly or wrongly, many perceived corruption as a direct consequence of opening to the outside, rather than a domestically produced ill. Many of the cases exposed in the press were those of officials bribed by foreign or overseas Chinese businessmen. More generally, there was the concern that the open door involved Westernization, the adoption of non-Chinese ways of thinking and living that were the opposite of all that the socialist leaders had sacrificed and fought for. Thus a series of four campaigns from 1981 through the late 1980s opposed “bourgeois liberalization,” meaning the introduction of non-Chinese, nonsocialist ways of thinking and living consequent upon the turn to the West and the market.
Less was heard about these worries after Deng Xiaoping’s 1992 “Southern tour,” which revived the momentum of reform after the setback of the 1989 political crackdown. In his speeches and sayings while visiting the southern open zones, Deng set market reform and the open-door policy beyond political cavil by insisting that policymakers should no longer ask whether a policy was “socialist or capitalist in nature” but whether it served to advance the economy and citizens’ economic welfare. Among post-Deng leaders, Jiang Zemin and Zhu Rongji have been resolutely pro–open-door, while even conservatives like Li Peng have refrained from mounting any explicit challenge to the policies sanctified by Deng.
However, Deng’s policies alone are unlikely to suffice in the next stage of reform. In Chapter 3, Zhaohui Hong and Yi Sun recommend that the deepening of economic reform be accompanied with a new “ideology of modernization” that combines Chinese cultural beliefs and Western ideas. They counsel that the leaders need to establish an effective legal system to guard against problems such as official corruption, loss of public assets, unemployment, and tax evasion. By reshaping the belief system and reconstructing social order, Hong and Sun believe, the post-Deng leadership has the opportunity to offer China a historic and comprehensive ideological, economic, and political “New Deal.”
Part 2 addresses the core of successful economic reform, the long-standing problem of inefficient SOEs. At the Fifteenth Party Congress, the party embarked on an ambitious intensification of reform in this, the most problematic sector of the economy. Experimentation over the course of Deng’s reform has proven to the leadership’s satisfaction that privatization makes firms more efficient. Shaomin Li explores why this is the case under Chinese conditions. His data demonstrate that state ownership continues to damage firm performance, and that industries owned by local governments are more efficient than those owned by more-protective higher levels of government. Even though privatization of enterprises is the only way to achieve thorough, widespread improvement in performance, ideological resistance remains, and he points out that privatization would also require changes in the legal system that would have rebound effects on political life.
Further addressing the privatization of state enterprises, Guoqiang Tian and Hong Liang argue in favor of full privatization rather than the disguised perpertuation of state ownership through a stock system. The line adopted at the Fifteenth Party Congress was to reform state-owned enterprises through a shareholding system (gufen zhi). Tian and Liang believe the reform cannot be effective until individual shareholders hold the controlling shares, and they explain why. However, they worry that the rapid expansion of employees in government organs and agencies may consume the gains from even the most successful SOE reform. They suggest that SOE reform must go hand in hand with a resolution of this problem, or be undertaken in vain.
SOE reform is closely linked with China’s posture toward the world economy. To deepen reform in one of these areas requires deepening reform in the other, and by the same token the paralysis will be mutually reinforcing if either SOE reform or integration into the world economy ceases to progress. This logic emerges clearly in Jason Yin’s chapter on China’s negotiations for entry into the World Trade Organization (WTO). Since initiating the application for membership in 1986, China has reduced SOEs’ contribution to industrial output from 62 percent to 30 percent (as of 1996); lowered tariffs from an average 36 percent in 1993 to an average of 17 percent in 1997 with a target of 10 percent in 2005; removed many nontariff barriers, including many import quotas, licenses, export subsidies, and restrictions of foreign trading privileges; improved its policies with regard to “national treatment” (the principle that a country is required to treat foreign products the same as domestic products once they are inside the country); and made significant improvements in the legal provisions for and enforcement of intellectual property rights.
As extensive as they are, these changes are far from having brought China into full interdependence with the world economy. Even though China has jumped to tenth place as a world trading economy with a total import and export value of $325 billion, it remains less of a world trader than Canada ($394 billion), Hong Kong ($397 billion), Japan ($761 billion), Germany ($949 billion), or the United States ($1,578 billion). Even Taiwan, a political unit a fraction of China’s size, has a total import and export value of $232 billion. At official numbers, China’s foreign trade ratio of 36 percent (in 1990–1994) is only about the same as that of other large developing countries such as Indonesia, Brazil, and Nigeria. But in “purchasing power parity” terms it is less, at about 10 percent of GDP. 2 China is still a mercantilist state with plenty of nonmarket, state-directive tools in its tool kit and an incomplete transition to market norms.
The United States is demanding further reforms as the price of WTO accession: further lowering of tariff rates, further dismantlement of nontariff barriers, further opening of the service sector, and reduction of barriers to foreign investment. Yin argues that the cost of further concessions may not be worth the benefits to be gained. The cost of membership will be paid chiefly by the protected SOEs, which are already in a fragile state and facing the challenges of Zhu Rongji’s intensified reforms. Any trade deficits resulting from WTO entry will hurt China’s foreign exchange reserves and its financial stability at a time when the Asian financial crisis presents unknowable dangers.
The WTO story remains part of the ongoing story of Chinese concessions made on many fronts as it has joined the world economy, and of the domestic political and human costs of these concessions (which parallel the more often-noted political and human gains). For besides the weakening of China’s international autonomy, economic reform today, as in the past, exerts direct and indirect impacts on China’s domestic political economy. When one opens former pillar industries—among them steel, automobiles, machinery, electronics, and heavy chemicals—to foreign competition and submits them to the mercies of the international market, the potential impact is great on employment, state tax and profit remittances, and on the banks.
Several of our authors argue that the crises arising from these pressures could eventually make political reform irresistible. Xiaonong Cheng’s chapter shows how privatization will hurt the interests of workers, thus undercutting part of the political support for the regime and contributing to a political crisis. Under the long-standing, tacit Chinese social contract, the state protected the interests of many urban residents, most of whom were employed in the state sector, and received their political loyalty in return. Now this arrangement blocks state sector reform by tying political stability to the state’s capacity to deliver welfare to the politically strategic industrial working class. If the reconstruction of the state sector is to succeed, it must break this social contract, and, in doing so, it is likely to damage the cooperation between urban people and the regime and undermine political stability.
Cheng’s concerns are echoed by Wei Yu in his analysis of the financing of two major urban social welfare programs—unemployment insurance and pension insurance. According to Yu, middle-aged and older workers in SOEs who spent most or all of their working lives during the period of planned economy are now suffering from the economic shortcomings of that system. With few savings and no training for today’s job market, they have parents to support and children to raise. Policies on unemployment insurance and insurance for retirement must take this situation into account or face opposition in a crucial sector of society. During the transition from plan to market, however, the financial burden of such insurance is too much for enterprises and local governments to bear. Yu recommends that the national government step in and share the cost, using taxes, SOE assets, or even public debt to finance its share.
Yang Zhong, Jie Chen, and John M. Scheb II confirm the political sensitivity of economic reform by showing on the basis of survey research that Beijing residents tend to base their support for the government on economic performance and worry that economic change will affect their livelihoods. A majority of the people in Beijing have enjoyed improvements in their living conditions and social status during reform. Their high level of life satisfaction leads to relatively high levels of confidence in the future economic development of China. If political support is premised on economic welfare, then a growing body of urban poor, consisting of former employees of bankrupt state-owned enterprises, could be a source of instability for China in the future.
Domestic instability or international tensions will have unpredictable effects on China’s reform course. They could lead either to an acceleration of reform, or to its deceleration or abandonment. Despite all the difficulties that it faces, China is probably too far integrated into the world economy to get out easily. The economy has expanded more than fourfold since 1978, in the process lifting 200 million people out of poverty. 3 Only South Korea and Taiwan have comparable records of growth. Having been forced into a wide-ranging change of its economic and political systems by the economic and political crises of the late Mao years, China would not lightly give up what are at least perceived to be and probably are the direct benefits of integration into the world economy.
Yet the lesson of history is that in extremis, China does have the capability to revert to relative autarky. In a “China-threat” scenario in which China was drawn into war or found itself facing active containment, or in an instance of domestic turmoil caused by rapid social change, China does have the capability to reverse its reform course. Its natural resources, technological base, and economic scale and complexity make economic self-reliance a possible although costly option. Alternatively, if reform stalls, China could continue to pursue its current relatively dirigiste economic policies at home and mercantilist policies abroad for an indefinite period into the future.
Assuming the continuing enlargement of the open-door policy and deepening of state enterprise reform, however, as most contributors to this volume do, China still has a variety of options. Part 3 of the book addresses China’s choice of macroeconomic strategies for the future. Gene Hsin Chang’s contribution shows that the leadership group in charge of the economy today was formed starting in 1992, and that it consists for the first time in Chinese history of economists knowledgeable about modern market systems and international finance. In light of this personnel continuity, Chang expects post-Deng economic policies to continue in the spirit of the policies since 1992. Macroeconomic policies will be cautious enough to maintain economic stability while aiming at a growth rate adequate to provide jobs. The objectives of a GDP growth rate of 8–9 percent and an inflation rate of 4–6 percent for the coming decade are challenging, according to Chang, but not impossible.
The contribution by C. W. Kenneth Keng points to the geographic unevenness of development under the reforms. Growth under reform has created nine regional economies that he thinks are likely to consolidate into four. To the often-asked question of whether reform leads to regionalization or integration, Keng in effect answers “both”—in fact, the two trends are not in conflict. Like Europe, greater China will be both one and many, integrated to differing degrees at different geographic levels. One important implication of this argument is that continued fast growth presents an opportunity to solve the vexing problem of Taiwan’s relations to the mainland. In a high-growth scenario Taiwan will face powerful incentives to integrate its economy with those of Fujian and Guangdong, thus conceivably dissolving the political suspicions of the past. Keng suggests a number of institutional models that could accommodate this kind of multiregional politico-economic relationship.
The contributors to this volume are by no means unified in either their prognoses or their proposals for China’s future. Some express pessimistic attitudes toward the political dilemmas of economic reform, while others more optimistically suggest ways that these dilemmas can be alleviated. While all the authors who address SOE reform believe in privatization, they differ in their judgment about the speed with which the transition from a mixed property rights regime should be accomplished.
What most worries China’s citizens and foreign friends alike is how China’s navigation of the shoals of economic reform will affect its fragile political system. Even if it hews to its present course, it is by no means clear that China is heading toward capitalist democracy. That is the globalist, optimistic orthodoxy in the world today that lies behind the approving commentaries on the op-ed pages and many of the programs in support of reform mounted by governments and foundations worldwide. But the alternative is that economic reform will lead China into “communist corporatism,” a Chinese version of the Japanese and Korean chaebol economy in which the government works hand in hand with a small number of favored conglomerates to promote national economic interests abroad and elite political control at home. Indeed, a major plank of Zhu Rongji’s reform plan is to concentrate state resources on the five hundred largest state firms, aiding them with favorable interest rates, protection against import competition, tax and price concessions, preferential access to supplies, and protection from unofficial fiscal levies. While our contributors all support bold forward movement on China’s reform course, some worry that the regime may at some point respond to its political choices with intensified repression.
Against this prospect, the contributors offer a variety of suggestions for assuring that China’s leap into the future ends in an economic and political soft landing. Their recommendations include re-ideologization (Hong and Sun), improvement of state-society relations (Cheng), political democracy (Wu), property rights reform (Li, Tian, and Liang), social welfare reform (Yu), and regional economic integration (Keng). Such thinking is informed by and influences debates going on within China. While we cannot predict what choices the leaders will make, the essays in this volume offer a sense of the options that thoughtful Chinese see before them.
Endnotes
Note 1: See Andrew J. Nathan, China’s Crisis: Dilemmas of Reform and Prospects for Democracy (New York: Columbia University Press, 1990), chapter 3. Back.
Note 2: World Bank, China Engaged: Integration with the World Economy (Washington, DC: World Bank, 1997), p. 6. Back.
Note 3: World Bank, China 2020: Development Challenges in the New Century (Washington, DC: World Bank, 1997), p. 1. Back.
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